After eight years of careful debate, Congress is poised to pass a reform bill that will restore fairness to the American bankruptcy system. The bill ensures that those who clearly need bankruptcy protection will continue to have access to this important part of our nation’s safety net. It also institutes a needs-based test to help determine whether filers can afford to repay at least some of their unsecured debts.

Critics have grossly mischaracterized this common-sense bill. Please consider the following rebuttals to myths being circulated by the bill’s opponents.

MYTH : The bankruptcy reform bill will prevent the neediest Americans from obtaining bankruptcy protection.

FACT : Under the reformed system, debtors who make less than their state’s median income – an estimated 80 percent of filers – will qualify for full discharge of their debts through Chapter 7 bankruptcy protection. For those making more than the median income, a test that compares income versus expenses will be used to determine whether they are able to repay a substantial portion of their unsecured debt. An estimated 10 percent of filers will "pass" the means test and become candidates for a Chapter 13 repayment plan. The court then has the discretion to consider any "special circumstances," such as medical bills, that could demonstrate the debtor deserves complete relief from their debt, despite the findings of the means test. The end result is that more than 90 percent of filers will continue to have the same bankruptcy options that are available under the current framework. The system will remain sympathetic to individuals who, because of divorce, job loss, serious illness, or another life-altering event, have been forced into bankruptcy.

MYTH : The increased cost and paperwork required by the bankruptcy reform bill will make it harder to file for bankruptcy protection.

FACT : Establishing standardized criteria for filers will help ensure the system is used appropriately. Filers will be required to present a recent tax return to demonstrate whether their income is above or below their state’s median. They also will be required to seek credit counseling within six months prior to filing bankruptcy. This requirement could prevent needless bankruptcy filings by helping debtors assess non-bankruptcy options before they set foot in a bankruptcy court. Furthermore, the credit counseling described in the legislation would be offered regardless of the consumer’s ability to pay.

MYTH : The rise in bankruptcies is a result of too much credit extended by banks and credit card companies.

FACT : Experts agree that medical crisis, divorce and job loss are the leading reasons that individuals seek bankruptcy protection. During these tough times, credit cards are often the life raft that keeps people afloat. As a result, over-dependence on credit cards is more often a symptom, and not the cause, of a dire financial situation. In the average bankruptcy petition, bank card debt represents less than 16 percent of total debt. Overall, SMR Research conservatively sets the total percentage of bank card debt at 5 percent of all consumer debt or up to 9 percent if retail cards, private label cards and gas cards are included.

MYTH : The bankruptcy reform bill is a windfall for credit card companies.

FACT : The new needs-based bankruptcy system will mean fewer losses for all businesses that extend credit to their customers – from the local auto repair shop and furniture outlet to the largest and smallest of credit unions, retail stores, banks and medical providers. Healthier businesses in turn will employ more workers, provide a better return for investors and serve their customers more effectively and economically. Moreover, the bill will reduce the economic burden passed on to American families – the overwhelming majority of which dutifully pay their bills and honor their obligations. Current estimates indicate that each American household pays an additional $400 a year in higher prices for goods and services because of bankruptcy losses.

MYTH : The bankruptcy reform bill leaves open loopholes for the rich.

FACT : The reform bill significantly limits two practices that some wealthy fliers use to hide assets from bankruptcy creditors. Under the current system, in states with unlimited homestead exemptions, debtors can shield the full value of their residences from creditors. To discourage debtors from relocating to a state to hide assets prior to a bankruptcy filing, the legislation requires a 3-year residency before a debtor can take advantage of a state’s full homestead exemption. In addition, the bill adds a specific provision that prevents filers from shielding funds in an asset protection trust when fraud is involved. In fact, these practices will continue unabated unless this legislation is passed.

MYTH : The bill’s mandatory credit counseling provision puts filers in the hands of a corrupt and unregulated credit counseling industry.

FACT : The bankruptcy reform bill includes new guidelines that credit counseling agencies must follow to provide services outlined in the legislation. To be approved, an agency must demonstrate to the Executive Office of U.S. Trustees, a division of the Justice Department, that it has effective programs with adequate facilities, qualified counselors and strong financial safeguards.

Trustees may waive the credit counseling and financial education requirement if such services are not "reasonably available" in their districts. In addition, Congress, the Internal Revenue Service, the Federal Trade Commission and state legislators are working to rein in problem credit counseling agencies. As part of the clean-up process, the IRS will revoke the tax-exempt status of a number of credit counseling agencies. The first group of agencies is expected to be announced in the very near future.

MYTH : The bankruptcy reform bill unfairly targets bankruptcy attorneys.

FACT : The legislation includes modest reforms to ensure that consumers receive full disclosures from bankruptcy attorneys regarding the services the attorneys will provide consumers. Under the current system, so-called "bankruptcy mills" push consumers into bankruptcy court without the consumer fully understanding the situation. In addition, bankruptcy attorneys will be expected to certify that their clients’ petitions are grounded in fact.
The American Bankers Association, on behalf of the more than two million men and women who work in the nation's banks, brings together all categories of banking institutions to best represent the interests of this rapidly changing industry. Its membership-which includes community, regional and money center banks and holding companies, as well as savings associations, trust companies and savings banks-makes ABA the largest banking trade association in the country.