Several weeks ago President Bush signed a new federal bankruptcy law, which, when it takes affect, will make it harder for folks to completely erase their debts. In my mind, this change in the law was needed to curtail abuse in the bankruptcy arena.
Being of the old school that takes pride in paying our bills, I couldn’t see why any reasonable person would find fault in tightening up the rules to oblige working folks to pay some portion of their debts.
I wasn’t surprised when some lawyers took issue with the new law. It’ll cut into their paychecks and nobody wants to make less money for doing the same thing. I was, however, somewhat surprised to see financial columnists criticize the new bankruptcy rules as being unfair to middle-class America.
For example, in a column appearing in the May 2, 2005 issue of U.S. News & World Report, Lou Dobbs described the new bankruptcy law as an “assault on the middle class.” He also described this new harsh treatment of ordinary working people as a shame in the face of the massive federal deficits our government is running up each year.
Less surprisingly, Harvard Law School professor Elizabeth Warren is quoted in the Dobbs’ column as calling the new law “war on the middle class.”
My knee-jerk reaction was one of anger and astonishment. War on the middle class? Because people are going to have to pay a portion of their debts? What am I missing here?
Stupidity, irresponsibility or divorce
In my years as a practicing CPA, most of the personal bankruptcies I encountered were the result of stupidity, irresponsibility or divorce. In most cases divorce was the primary cause of the bankruptcy, and many of those were unjustified. I frequently encountered the attitude that “my marriage is bankrupt, she got everything, my life is in shambles and I just want to start over.” Not a very honorable attitude, but pervasive nonetheless. I don’t recall any instances where medical expenses were the root cause of filing bankruptcy. Or unemployment either.
I have been out of practice for awhile and things have changed. Medical expenses have increased at an unbelievable rate and the healthcare industry has undergone a big change in attitude. I suppose as a result of tightening reimbursement rules, hospitals and physicians have become much tougher on collecting money due them.
And, the cost of healthcare has become a major financial issue for everyone.
A couple of other factors…
On the subject of healthcare cost, a sobering statistic came out a study conducted by Harvard. That study concluded that almost half of personal bankruptcies result from medical bills. Further, of those filing bankruptcy in the face of staggering medical bills, about 75% had health insurance at the onset of the illness. The ever-rising cost of healthcare has changed the financial playing field since I left public accounting practice a decade or so ago.
Long-term unemployment is another major cause of personal bankruptcy in recent years. And, there to, the playing field has changed over my lifetime.
When I finished college in 1971, as best I can recall, most everybody was able to get a job in their field of study. That’s not true today. Additionally, lifetime job security for the hardworking was a safe assumption in those days. Again, that’s no longer true.
Looking to just the two issues of staggering healthcare bills and long-term unemployment, the new bankruptcy law will make it tougher for folks with legitimate financial problems to sweep the slate clean and start over. This is both a bad thing and a good thing.
Bad in the sense that working folk are going to be less able to wipe the slate completely clean and get on with a productive life. The law is new and, of course, complex. However, it’s my understanding that people who have the means to pay some portion of their debts are going to have to fork over some of their income to their creditors rather than walking away scott-free.
On the other hand, it will be good for those suffering financial catastrophe to have a proscribed process to restore a measure of their dignity by paying what they can toward debts that they owe. I don’t think we talk enough about honor and dignity in our country these days. These are character traits that help separate us from the other animals and without them, our society reverts to back to a jungle.
As for those who scream to high heaven that they have been snookered into charging too much on credit cards and are now being ruined by high interest charges, I have some fairly simple, but highly effective advice — don’t use credit cards!
Even if you control your credit card charging, you’re still spending tomorrow’s income today, and that’s a fool’s strategy any way you cut it.
Thought for the Moment
Solve the small problem before it becomes big. The most involved fact in the world could have been faced when it was simple. The biggest problem in the world could have been solved when it was small. — Lao Tzu, from the book “The Way of Life,” 604 B.C.E.
Joe D. Jones, CPA (retired), is publisher of the Mississippi Business Journal. Contact him at firstname.lastname@example.org.