Don’t bank on bankruptcy

Ruth McCullagh

New law makes it difficult to get a fresh start

Jamie Pace, senior art education major, accumulated $9,000 in debt during her college “experience” and used an education loan to pay it off.

Credit: Steve Schirra

Senior art education major Jamie Pace had $9,000 in credit card debt for school-related purchases before using her student loan from Huntington Bank to pay it off.

Pace took out the loan two months ago because she student teaches this semester and doesn’t have time for a full-time job to pay her bills.

“If I had never found out about this loan, I don’t know what I would have done after I graduated,” said Pace, who graduates in December.

Pace is lucky. Because of her student status she was able to qualify for the loan and make her debt manageable.

Unfortunately, many Americans are unlike Pace – their debt isn’t manageable. Oftentimes when worse comes to worse, debtors file for bankruptcy. However, on Oct. 17, a new bankruptcy law signed in April went into effect.

The “Bankruptcy Abuse Prevention and Consumer Protection Act of 2005,” makes the most changes to bankruptcy law since the 1978 Bankruptcy Code.

Instead of Americans being able to have their debts forgiven, which was possible under Chapter 7 bankruptcy, many will be pushed into Chapter 13 bankruptcy, where they will begin a repayment process.

Under Chapter 13, one must earn above the state’s median income ($62,642 in Ohio for a family of four) and be able to pay $100 a month for five years toward their debt. The new law requires those contemplating bankruptcy to attend government-approved credit counseling and money management sessions 180 days prior to submitting the claim.

Ed Mierzwinski, consumer programs director of the U.S. Public Interest Research Group, was quoted in an April Consumer Federation of America news release as saying, “by making it harder for consumers to wipe away abusive loans in bankruptcy, this bill rewards the bottom feeders in the lending industry.”

The Consumer Federation of America, which publishes Consumer Reports, also wrote in its release that, from January 1980 to January 2004, consumer debt, most of which is credit card related, has increased fifteen-fold from $54 billion to $791 billion.

“My worry is about that middle-class guy; the one who is just getting by,” junior political science major Chris Boerum said. “What about when something bad happens, like he gets cancer or loses his job? Now, because he makes that minimum income he’s forced to pay it back when he should be able to discharge it in court.”

“It just makes it a lot harder on the person,” said Alyse Rothenberg, junior early childhood education major.

“They have limited opportunities to fix their situation,” Boerum added.

Contact features correspondent Ruth McCullagh at [email protected].