The Volokh Conspiracy - Bad Advice About Bankruptcy in Parade Magazine:

Parade Magazine (a common supplement to many Sunday newspapers) is the highest-circulation magazine in the country. And I know that they try to keep things simple for readers. But this week's Parade has some disastrously bad advice about bankruptcy for people in financial distress in an article "Is There Any Escape from Debt?"

Here's the entire article:

Last year, 822,000 American families declared bankruptcy—a 38% increase. But how much does declaring bankruptcy really help strapped consumers? A 2005 bill made it harder to file by increasing fees and mandating credit counseling. In addition, if you make more than the median income in your state, the law may prevent you from getting a fresh start. Instead of having your debt wiped clean, you'll often be required to repay it over three to five years. The rules also allow credit-card companies to receive repayment based not just on the original charges but on accumulated interest and late fees, too. For example, a $2000 doctor bill and an $800 credit-card bill that swells to $2000 with penalties and fees are both treated as $2000 bills.

If it's your mortgage that's the problem, bankruptcy offers even less relief. "There is very little that bankruptcy can do about mortgage debt," says Elizabeth Warren, a bankruptcy expert at Harvard Law School. "It can handle other debt, freeing up money to make mortgage payments." Politicians in both parties have recognized a need to amend the law and allow more help with mortgage debt, but no new bankruptcy legislation is likely to pass until 2009. In the meantime, says Prof. Rich Hynes of the University of Virginia School of Law, more people may declare " informal bankruptcy." How does that work? "The consumer just fails to pay and endures whatever pressure the creditor can apply."

There are some major problems here that could confuse people who need bankruptcy.

"In addition, if you make more than the median income in your state, the law may prevent you from getting a fresh start. Instead of having your debt wiped clean, you'll often be required to repay it over three to five years."

This is the most important error because of the negative impact it can have of deterring people to file who need to. The "means-testing" provisions of the bill does not prevent you from getting a fresh start. You can still get a discharge--you may just have to file chapter 13 and enter a 3-5 year repayment plan (usually 5 if you are means-tested). But you can still get your debt wiped clean. Also, the article implies that you are required to repay all of your debt--this is not correct. You will be required to repay what you can of your unsecured debt out of your disposable income, whatever that percentage may be (30, 60, or 100%). But you still get a discharge.

"The rules also allow credit-card companies to receive repayment based not just on the original charges but on accumulated interest and late fees, too. For example, a $2000 doctor bill and an $800 credit-card bill that swells to $2000 with penalties and fees are both treated as $2000 bills."

This is a terribly confused passage. First, it implies that this was a change made by the 2005 legislation--it isn't. Second, it implies that this is unique to credit cards--it isn't. If the doctor's bill has collected interest before bankruptcy (and most do), then the accrued interest is part of the claim as well. Third, this is completely beside the point for bankruptcy--you get to discharge this stuff. All the accrued interest issue relates to is how much the doctor collects versus the credit card company, not the impact on discharge. The reporter seems confused about this point. Put more bluntly, if it is unsecured debt, from the perspective of a bankruptcy filer it doesn't matter who the claimant is or how much of the claim consists of interest versus other charges.

With respect to mortgages, the author is basically correct--bankruptcy provides little relief for purchase-money mortgages.

Overall, this is a really confused little article. If you think you are in need of bankruptcy relief, please see a lawyer or someone else you trust and don't rely on this little article. Contrary to what the article says, the answer is that filing bankruptcy helps strapped consumers a lot.

	[Todd Zywicki, November 2, 2008 at 11:11am] Trackbacks Bad Advice About Bankruptcy in Parade Magazine: Parade Magazine (a common supplement to many Sunday newspapers) is the highest-circulation magazine in the country. And I know that they try to keep things simple for readers. But this week's Parade has some disastrously bad advice about bankruptcy for people in financial distress in an article "Is There Any Escape from Debt?" Here's the entire article: Last year, 822,000 American families declared bankruptcy—a 38% increase. But how much does declaring bankruptcy really help strapped consumers? A 2005 bill made it harder to file by increasing fees and mandating credit counseling. In addition, if you make more than the median income in your state, the law may prevent you from getting a fresh start. Instead of having your debt wiped clean, you'll often be required to repay it over three to five years. The rules also allow credit-card companies to receive repayment based not just on the original charges but on accumulated interest and late fees, too. For example, a $2000 doctor bill and an $800 credit-card bill that swells to $2000 with penalties and fees are both treated as $2000 bills. If it's your mortgage that's the problem, bankruptcy offers even less relief. "There is very little that bankruptcy can do about mortgage debt," says Elizabeth Warren, a bankruptcy expert at Harvard Law School. "It can handle other debt, freeing up money to make mortgage payments." Politicians in both parties have recognized a need to amend the law and allow more help with mortgage debt, but no new bankruptcy legislation is likely to pass until 2009. In the meantime, says Prof. Rich Hynes of the University of Virginia School of Law, more people may declare " informal bankruptcy." How does that work? "The consumer just fails to pay and endures whatever pressure the creditor can apply." There are some major problems here that could confuse people who need bankruptcy. "In addition, if you make more than the median income in your state, the law may prevent you from getting a fresh start. Instead of having your debt wiped clean, you'll often be required to repay it over three to five years." This is the most important error because of the negative impact it can have of deterring people to file who need to. The "means-testing" provisions of the bill does not prevent you from getting a fresh start. You can still get a discharge--you may just have to file chapter 13 and enter a 3-5 year repayment plan (usually 5 if you are means-tested). But you can still get your debt wiped clean. Also, the article implies that you are required to repay all of your debt--this is not correct. You will be required to repay what you can of your unsecured debt out of your disposable income, whatever that percentage may be (30, 60, or 100%). But you still get a discharge. "The rules also allow credit-card companies to receive repayment based not just on the original charges but on accumulated interest and late fees, too. For example, a $2000 doctor bill and an $800 credit-card bill that swells to $2000 with penalties and fees are both treated as $2000 bills." This is a terribly confused passage. First, it implies that this was a change made by the 2005 legislation--it isn't. Second, it implies that this is unique to credit cards--it isn't. If the doctor's bill has collected interest before bankruptcy (and most do), then the accrued interest is part of the claim as well. Third, this is completely beside the point for bankruptcy--you get to discharge this stuff. All the accrued interest issue relates to is how much the doctor collects versus the credit card company, not the impact on discharge. The reporter seems confused about this point. Put more bluntly, if it is unsecured debt, from the perspective of a bankruptcy filer it doesn't matter who the claimant is or how much of the claim consists of interest versus other charges. With respect to mortgages, the author is basically correct--bankruptcy provides little relief for purchase-money mortgages. Overall, this is a really confused little article. If you think you are in need of bankruptcy relief, please see a lawyer or someone else you trust and don't rely on this little article. Contrary to what the article says, the answer is that filing bankruptcy helps strapped consumers a lot.