March 15, 2005, 7:44 a.m. Bankrupt Criticisms The bankruptcy bill
deserves to pass. By Todd Zywicki
http://www.nationalreview.com/comment/zywicki200503150744.asp (viewed
April 11, 2005) Excerpt.

 The most important and controversial provision of the legislation is
the "means-testing" of chapter-7 bankruptcy relief. Under current law,
a person filing bankruptcy has two options. The debtor can file in
chapter 7, the "liquidation" provision, which permits debtors to
simply surrender all their assets and get a full discharge of
unsecured debts a few months later. Or the debtor can file in chapter
13, under which he enters into a court-supervised repayment plan for a
period of 3 to 5 years, during which he pays all of his "disposable
income" to pay off what he can of his unsecured debt. To calculate the
debtor’s available "disposable income," a judge uses his own
subjective preferences to determine the debtor’s allowed living
expenses.

The means-testing provisions of the bill will bring some rationality
to this system. Those who make above the state median income (adjusted
for family size), and can repay a substantial portion of their debts
without significant hardship, would be required to file in chapter 13.
At the end of the chapter-13 plan, this high-income filer would still
get a discharge, just as other bankruptcy filers do. There is no
"endless treadmill of payments,"just a requirement that high-income
debtors repay what they can.

In determining whether the debtor can repay a substantial portion of
his debts, the legislation makes allowances for a whole range of
expenses right off the top. First, it creates a standardized slate of
expenses based on the relevant family size and regional cost of
living, for such things as clothing, food, transportation, etc.,
eliminating the subjective judicial navel-gazing of the current
system. It then subtracts from your income all of the debtor’s actual
payments on secured debts, such as a home mortgage, car loan, or the
like. The debtor can subtract any actual expenses for health care for
himself or a dependent, as well as payments for health insurance
premiums. Finally, there is an allowance for children’s educational
expenses. If after subtracting out all of these expenses, the debtor
still can repay $10,000 or 25 percent of his debts over a 5-year
period, then he would be presumed to have to file in chapter 13.

The debtor could rebut this presumption by showing "special
circumstances" that make it too much of a hardship to file in chapter
13, in which case the debtor would still be permitted to liquidate his
debts in chapter 7.

So how many people would be affected by means-testing? The estimates
are that some 7-11 percent of current bankruptcy filers would be
affected by the means-testing provisions of the bill. Roughly 80
percent of bankruptcy filers earn below their state median income, and
so will get tossed out of the means-test immediately. For that 80
percent --roughly 1.2 million of the 1.5 million bankruptcy filers
last year -- the means-test will be completely irrelevant. They will
be permitted to file chapter-7 bankruptcy just as under the current
system. Roughly half of the remaining 20 percent of filers won’t be
able to repay enough of their debt to meet the repayment criteria, so
they will be dropped out as well and be permitted to file just as
today. So in the end, only the highest-income filers with the largest
repayment capacity will be affected.