Bankruptcy Blog

Why I Think Chapter 13 Bankruptcy is a Great System

I like this system for a number of reasons:

1)      In order to get relief from the bills, the debtor needs to prove he/she can make a monthly payment for 3-5 years. This means the debtor needs to prove he can budget. He needs to establish a stable monthly income. He needs to NOT incur additional debts. Essentially, the debtor needs to prove he is making changes that will help prevent another situation where he incurs a lot of debt. If he can do so, he is given a second chance.

2)      In general, the higher the income, the more is paid back.

a.       Take a situation in which a highly successful financial advisor is sued for $75,000. The educated, knowledgeable, successful financial investor presumably had every opportunity to avoid the $75,000 lawsuit. The Chapter 13 bankruptcy code still offers this individual benefits, but he will have to re-pay the entire $75,000. The benefit a chapter 13 offers is that the debt will not be due for 60 months! This delay in payment allows the debtor time to get his finances in order and afford the $75,000 without totally destroying his other finances.

b.      Whereas, if the less fortunate individual incurred $75,000 of debts, he will only pay back 1%, or $750 TOTAL. At first this might not sound fair, but think about how most individuals like you and me get into debt: Many times it is from predatory lending from banks; criminally high interest rates; insanely high medical bills; predatory education loans. These institutions take advantage of individuals, and now the individual is able to fight back with a bankrutptcy! I, for one, am glad these institutions are only getting 1% - maybe it will be the catalyst to stop unfair, deceptive acts and practices among the lending industry.

3)      The “cram-down” rule in bankruptcy is great because it rewards the debtor that made a good-faith attempt for more than 2.5 years, and hurts the lender that over-charged for the vehicle. A “cram-down” in chapter 13 bankruptcy enables a qualifying individual to reduce the amount owed on a vehicle from (a) the amount still owed to (b) the current value of the vehicle. If the debtor has a reduction in income after 2.5 years, should the system punish that person by taking away their car that they’ve paid on for 3 years? Take away their transportation? Force them to spend even more money getting a new car? Or should the system allow the person to keep the car but essentially “refinance” it over 60 months to make the payment more affordable? I like the idea of helping the debtor afford the car they’ve been purchasing for 3 years, and allowing them to only pay what it’s worth, and possibly “sticking” it to the dealership that over-charged for the car in the first place.

Who should bear the burden of irresponsible lending/borrowing? If the bankruptcy code did not exist, the borrowers would bear the entire burden.

“Behind every ‘irresponsible borrower,’ is an irresponsible lender.” – Lucas Ruffing.

Lucas Ruffing