Credit Card eZine - News and Articles about Credit Cards

Whose Creditworthiness and Assets are Spared by New Bankruptcy Law?

2007-08-30

It is quite natural, let's admit it, that making a credit card deal with competitive rates and special programs for one's particular interests is the goal of most customers, irrespective of their incomes. And even if it appears that your average income does not actually afford you to have a good credit card, the plastic will still fly into your hands, which is the backbone of the creditor's predatory policy.

Now, try to see the point. It has become general practice with banks to grant you credit even if you make less than the median state income and they do make revenues, keeping you in constant debt.

But debt is not as awful as bankruptcy in fact, the more so because the new bankruptcy law can affect both - low income and high income customers - and affect them differently.

Who suffers more? Who is allowed to file under chapter 7 and have all the debts simply erased and who is required to go under chapter 13 and subject to a debt repayment plan?

 The answer is quite simple at some point. If you ventured to make a credit card deal or apply for a loan with less than the median income supporting you, the new bankruptcy law rules out the mere possibility of making you pay under chapter 13.

You are supposed to file under chapter 7 and have all your debts discharged as up to this point your creditors have already made their revenue out of you. They calculate beforehand all the ball game including bankruptcy so that they always win.

Now, what if your debt is actually the result of poor spending habits and abuse of the basic credit laws? What if you make substantial money but you do not pay off your balances or delay them just because you do not want to part with your money?

For such credit cardholders there exists number 13 chapter of new bankruptcy law. The credit card company makes the analyses of the customer's payment capabilities and if it appears that the customer has more than the median state income and is really able to cover a certain portion of the debt, then chapter 13 is his case.

Under the provision of this chapter, the bankrupt is to go through a debt repayment plan lasting from 3 to 6 years during which he is to repay the portion defined.

Well, everything seems perfectly clear and transparent so far. But on a deeper analysis we come up with a great deal of confusion. What sort of confusion do I mean? The point is that the new bankruptcy law uses a special device to determine whether a credit card holder can cope up with a definite portion of the debt or not.

The tool I am speaking about is called the means test and the problem with it is that it is frequently defected.   I will try to explain. Let us assume that you are a credit card user with more than the average state income. You also own many assets secured by significant secured debts. In this connection we can speak about mortgage or a car loan.

So, the money you owe on your mortgage or car loan is considered to be your actual expenses in fact and if the amount is rather substantial, you are automatically treated as a low income customer. Under the circumstances, no matter how big is the debt on all of your credit cards, you still avoid chapter 13 and file under chapter 7.

You won't have to pay back the money you borrowed, let alone the interest on it. Doesn't it appear that the new bankruptcy law with its means test favors high income debtors somehow? Not it that those who are carrying child support payments or alimony are also exempt from the means test and thus - from their debts.

So, is economically healthy to have a bankruptcy system that allows high income credit consumers to position their big secured debts as depressing their actual earnings and thus be protected by chapter 7 of bankruptcy law?

Why should they file for bankruptcy at all, if you are capable of repaying the debt? That's the confusion created by the new bankruptcy law and its means test and I strongly believe it needs consideration.