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Experts fear decade-old reforms are harming consumers

Charlotte Bankruptcy Lawyer Bryan W. Stone of Arnold & Smith, PLLC answers the question “What is Chapter 13 bankruptcy?”


Changes to the United States Bankruptcy Code enacted a decade ago were designed to lower the number of bankruptcy filings in the United States. Last year, bankruptcy filings were down about half from a decade ago, but bankruptcy experts wonder if the reforms “have done more harm than good,” according to The Economist.

Man at desk Local Bankruptcy Lawyer Charlotte Debt AttorneyAs a recent paper published by Stefania Albanesi of the New York Federal Reserve and Jaromir Nosal of Columbia University confirms, the decade-old bankruptcy reforms have “led to a permanent drop in the bankruptcy rate.”

However, Princeton assistant professor of Economics Will Dobbie and Jae Song of the Social Security Administration say that tightening bankruptcy rules may suppress the “good microeconomic effects” that easier bankruptcy rules produce. A bankrupt person has more incentive to work, for instance, if large chunks of one’s salary are not seized by creditors.

According to Dobbie and Song, people who were able to avail themselves of bankruptcy protection earned over $6,000 more in average income the year after declaring bankruptcy than those whose petitions were denied. Those whose petitions were denied, Dobbie and Song theorized, were more likely to “slip out of town, change [one’s] job and close down [one’s] bank account.”

The reforms to the Bankruptcy Code were enacted after major credit-card firms alleged that spendthrifts were abusing a Chapter 7 bankruptcy system that “made it easy to wash away debts.” The new, tougher rules—passed in 2005—were designed to shift more debtors to the Chapter 13 bankruptcy system, where debtors are required to repay some of their debts. As predicted, following the reforms, Chapter 13 bankruptcies rose relative to Chapter 7 filings.

However, the reforms also had some negative consequences. A recent study by Michelle White and her colleagues at the University of California, San Diego, shows “that bankruptcy reform caused the default rate on prime mortgages to rise” by almost a quarter.

Credit-card companies have claimed that if the rules on consumer bankruptcies are loosened, they may have to raise interest rates to cover losses incurred by the discharge of debts in bankruptcies. Dobbie and Song argue, however, that credit-card companies may be overstating that fear. The companies, they say, are often reluctant to raise interest rates, because higher interest rates attract “the dodgiest customers,” according to The Economist, and “the dodgiest customers” are the very ones who “know that, with luck, they won’t have to pay their debts back.”

A lower number of bankruptcies does not mean, experts warn, that less Americans are embroiled in financial hardship. To the contrary, Dobbie and Song allege, debtors who seek bankruptcy protection but who are rejected due to strengthened rules are finding it “trickier” to work things out with creditors and to make their way in life.

If you find yourself needing the services of an experienced Charlotte, North Carolina bankruptcy attorney, please call the skilled lawyers at Arnold & Smith, PLLC find additional resources here. As professionals who are experienced at handling all kinds of bankruptcy matters, our attorneys will provide you with the best advice for your particular situation.



About the Author

Bryan 1Bryan Stone is a Partner with Arnold & Smith, PLLC, where he focuses his practice on all aspects of bankruptcy, including: Chapter 7, Chapter 11, Chapter 13, home loan modifications and landlord-tenant issues.

A native of Macon, Georgia, Mr. Stone attended the University of Georgia, where he earned a BBA in Banking and Finance, and Wake Forest University School of Law, where he obtained his law degree.

Following law school, Mr. Stone relocated to Charlotte, where he currently serves as Chair of “Bravo!” – a young professionals organization associated with Opera Carolina – and founded the University of Georgia Alumni Association of Charlotte.

In his spare time, Mr. Stone enjoys perfecting his barbeque skills for the annual “Q-City BBQ Championship” and playing softball in the Mecklenburg County Bar softball league.







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