Barack Obama on Tuesday proposed changing bankruptcy laws to fast-track the process for military families, help seniors keep their homes, and protect people recovering from natural disasters.
There is this illusion in much of our country that the majority of people who file bankruptcy are deliberate deadbeats. That people routinely run up credit cards with the intent to never pay them, and then file bankruptcy and start over. In 2005, the banking industry convince Congress that was the case: that consumers were deliberately trying to "rip off" the banking sector and that Congress needed to reign in consumers trying to weasel out of debt. At the same time the banking industry was pushing for this legislation, however, it was continuing to extend more and more credit to subprime borrowers (those with limited incomes and little or no credit history) at interest rates often above 24%. Not to mention the practice of shortening grace periods, adding additional fees, and changing terms.
Granted, in many cases folks need to be personally responsible and pay attention to these things. But the bill provided no exceptions for those who are forced into bankruptcy through no fault of their own. That same year, Hurricane Katrina hit, destroying thousands of homes and bankrupting countless Americans. Under bankruptcy law, even if you are forced into bankruptcy due to a natural disaster, you are still held to the same requirements as everyone else. Including the harsh means test, which looks at your income from the last six months to determine your ability to pay your debt. You are also forced into mandatory credit counseling, even though your ability to manage your credit had nothing to do with the fact.
The same holds true for individuals forced into bankruptcy due to medical conditions. Senior citizens are particularly vulnerable to this. With rising prescription costs and other medical costs, those on a fixed income can find almost all of their income going to medical bills. Yet these people are still required to undergo the same stressful, rigorous means test as anyone else.
And what about our soldiers serving overseas? John Doe joined the National Guard a year ago for extra income and because he wanted to make a difference in his local community. He works full time at a local refinery, making about $45,000 a year including OT. His wife Jill is a stay at home mom, and they have two kids.
Then John's unit gets called up for active duty. The good news is, his employer is required be federal law to hold his job for him. The bad new is, his family now suddenly has to depend solely on his Active Duty pay. John is a Private FC (E3). His active duty base pay is $1,598.90/month ($19,054.80/year). Adding his housing allowance, separation pay, and hazard pay*, that number goes to $2,581.30/month ($30,975.60/year). John has suddenly taken an almost $15,000 pay cut.
Within a couple of months, Jill can't cover all of the bills and finally the family has to file for bankruptcy. Unfortunately for Jill and John, they are filling under the bankruptcy laws of 2005, which force many debtors into Chapter 13 (restructuring debt) who otherwise would have used Chapter 7 (elimination of non-secured debt). The couple also is subject to the harsh means test, which means that John's entire income for the six months prior to filing bankruptcy is considered as part of his ability to pay. So while John is currently making active duty pay, part of his higher wage from his civilian employer is taken into account. The current bankruptcy laws also severely limit the personal property exemptions John and Jill can claim. And the current laws do not permit the judge to make special allowances for their situation. They are treated just as if they had deliberately ran up their credit cards and mismanaged their money, including MANDATORY credit counseling before they can complete the bankruptcy process.
Obama's plan would add the exceptions and safeguards to bankruptcy law that consumer advocates know should have been including in the original law in 2005. The fallacy of the 2005 laws are one of many factors that have contributed to the current housing crisis, because the more stringent bankruptcy laws have all but forced many people into foreclosure. Obama voted against the 2005 bankruptcy package because it did not include these safeguards. McCain voted for the package and rejected the addition of the safeguards.
Note---The bankruptcy bill does have some wording protecting active duty service members...but only if their state allows them to claim the federal exceptions. Currently 35 states do NOT.
Note---those forced into the mandatory credit counseling actually have to PAY for the credit counseling!
*Does not including clothing and incidentals allowances, as that money would be used by John to cover his personal expenses while active duty.
SOURCES:
http://www.1800goguard.com/careers/adpay.php
http://www.votesmart.org/issue_keyvote_detail.php?cs_id=V3480&can_id=53270
http://www.iht.com/articles/2007/11/08/bloomberg/bxinvest.php
http://www.consumersunion.org/pub/core_financial_services/002145.html
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Comments: 44
And there is no way we can avoid it.
One age ends, and another begins.
The government has grown 60% in the past 8 years but this has actually increased the
power of the corporations and transferred wealth abroad. The Defense spending is mostly "off-budget" and not even disclosed to Congress. It may be a trillion dollars a year. Five major corporations receive much of this money.
Naomi Klein's The Shock Doctrine offers a global view of the current adminstration's neo-liberal economic policies—privatization, free trade, slashed social spending. Catherine Austin Fitts may be right that the demise of Bear Stearns was a hit job, cannibalizing it for the good of other finance companies. There is an effort underway to centralize the economy and shift assets away from local communities. Fitts describes these efforts as "economic warfare" being conducted on a global scale, that is fostered by technology and "invisible weaponry," such as satellites. With the cooperation of the Bush administration the US economy is being purposely "pumped and dumped."
That's not actually true. Many people file long before that to try to avoid having cars repossessed or foreclosures. Banks don't give you a six month window of non-payment. And in the case of a natural disaster, those that file certainly aren't waiting six months if they can help it.
I know how hard it can be on lower enlisted folks; they get paid less, usually can't get base housing, lower moving weights allowed, etc. etc. I don't know for sure what they get today, but I sure remember when I was in how rough it was on families!
Unfortunately, too many abused this process in the past, with poor planning, spending habits, etc. I personally know of two people that worked for me that knowing times were rough, splurged on vacations to Disneyworld on credit, new furniture, and then filed! I couldn't do stuff like that myself... maybe nobody can now?????
Housing allowance is based on zipcode and amount of dependents you have. Most of the time is more than your rent or mortgage. Our housing allowence has always been more even when we lived in places like Hawaii that are very expensive.
He also yests COLA, and other pay that you did not include. My husband actually was making more money when he was serving in Iraq than his civilan job and he had a very good paying job to begin with. Many times a soldier will ask to be sent on a deployment just so they can make the extra money.
Being that we have been a military family for the past 17 years( both active duty and National Guard) and have lived at the low and middle end of the military pay scale the pay that the military provides is ample to live off of considering you get many more benefits including free healthcare and commissary privleges to name a few.
Most people I have come across over the years that would be in a situation that they would need to file for bankruptcy indeed overspend on their credit cards, and purchaces things they know they can not afford. Of course there are always exceptions.
Cost of Living Allowance
Basic Allowance for Subsistence
Basic Allowance for Housing
Family Separation Allowance
Jump Pay( if this is part of their duty)
Hardship Duty Pay
Hostile Fire/Imminent Danger
Per Diem
Soldiers receive $3.50 per day while outside the Continental Unites States and $2.50 per day while stateside.
Combat Zone Tax Exclusion
All military pay for enlisted Soldiers and warrant officers is excluded from federal tax
When I married my second husband, years ago, we immediately got several credit cards dangled in front of us like carrots and we agreed that it would be nice to have one or two of them "for emergencies." Isn't it funny how those emergencies show up more frequently when you have "means" to cope with them? If we didn't have the credit, we would have found another way to deal with the crisis, but instead... well, we got overextended. It was our fault. Then my husband began working for someone who was crooked and who took our high insurance premiums from his paycheck but did not pay them to the insurance company... not to mention that he never seemed to have the full amount of husband's paycheck and would tell him, "Next week I'll make it up to you and give you a bonus." Then he asked my husband to use his own gas card for the out of town trips and we would be reimbursed...
Of course, none of those positive things happened and suddenly my son needed emergency surgery. We were to find out later that we were uninsured for the entire hospital bill, etc.
We ended up in bankruptcy court. And within thirty days of the final court date, there were those credit card offers in the mail again... only this time, we did not bite. We made do without them and interestingly, we did just fine that way.
Years later, when my son was a senior in high school, he started getting those offers. How sorry can you feel for a bank who issues a credit card to an unemployed high school student? I begged my son not to get the cards... and of course, in his eyes, I knew nothing and it would be "a good thing to have in an emergency situation" as he was quick to tell me. Needless to say, within sixty days, he was over the limit (with no emergencies involved.)
Later, when I was on my own again (and got a couple of credit cards after the divorce, swearing to use them wisely ((which I did)) and barely paying for my bare necessities, I had a disabling injury which had me out of work for three months. Because of the lack of income, I lost the insurance which I had barely been able to pay for. The insurance company doubled my premiums due to "high claims" even though I had paid more out of pocket for the premiums, not to mention the deductible and copays, than they had paid for my claims... and I was without insurance again for several years during which I had multiple issues and several ongoing problems due to the previous injury.
I made a wise choice... to pursue my education (with grants and loans) while continuing to work full-time in a limited capacity due to the physical limitations. I was trying very hard to better myself so that I could make more money and take better care of myself. Again, I had a crisis, and ended up with no job, no income, no home and no chance of continuing the education. I thought it would be a short-term problem and I used the credit cards (minimally) to help to bridge the gap. It ended up not being short-term, and I was unable to keep up the payments. I retained a company to help me negotiate lower payments and for a while, I kept them up but was never able to really make a difference.
I probably should have filed for bankruptcy again... but I couldn't afford the $400 fee to do so. Instead, I simply stopped paying the bills. I should have made other choices, but did not.
I am now "disabled" by MS. Actually, I am not at all disabled but if I were to go back to working full-time doing the only things I have experience doing, I would quickly become that way again, as I did three years ago. I won't file bankruptcy again, though sometimes I think I ought to.
What happened to me to cause this situation?
It was a combination of having something available to me for "emergencies" and being overly optimistic about my future. Yes, I guess I was irresponsible, but I think I was irresponsible because I wanted so badly to take care of myself that I refused to ask for help. And I think that a lot of people find themselves in similar situations and react similarly as well. I hate it, but it's true.
I accept my part of the responsibility here and will not use a credit card, ever again. (The only time I have done so in the past five years was to pay for gas at a gas station which was closed for cash transactions at night when I was there, and then I put a check for the full amount of the purchase in the mail to the credit card company the very next day.)
I believe it is imperative to make exceptions to every rule, and even if I, myself would not have been granted leniency, I cannot conceive of putting the same restrictions on military families and seniors and people whose income is decreased through no means of their own.
Thank you, Julie for a very good article.
Military families income is not decreased. I do agree though that there should be exceptions to the rules but only when what happens is through no fault of their own.
How can you make such an ignorant statement. Military pay is inferior compared to civilian pay. Anyone with a calculator can figure that one out.
Julie - My husband was making well over that number and when he was called back to active duty. He was making more than his civilan job. Also you can't take the example in the article because you don't know what his housing amount was or how much his Bas, COLA, etc was. That amount is not the whole picture. Now does this happen to people? Yes in some cases it does. It all depends on a lot of factors.
http://www.todaysmilitary.com/benefits/compensation/military-vs-civilian-pay
You also have to take into consideration military benefits that civilans do not get. Like full medical coverage for the entire family.
Also I forgot to mention earlier when deployed in a combat zone you are tax excempt. So take into consideration the money going into your pocket that the goverment does not get.
I cited my source, straight from the National Guard website. I certainly didn't pull those numbers out of thin air. The information regarding the housing allowance and such came right from the National Guard website. You may be referring to normal active duty, not National Guard. My father was full time Army before he retired, so I certainly understand he got much more. Full time military have a host of better benefits available to them and their families.But the guys that signed on for one weekend a month/two weeks a year than suddenly get called up aren't paid the same way, as the National Guard's own site pointed out.
And no I am no talking about active duty I am talking about National Guard which my husband is a member of.
http://usmilitary.about.com/od/housingallowance/a/resbahenl.htm
"While we can argue the particulars in cold, hard cash, the reality is even if the pay is the same, or slightly more, the added expenses of having one spouse overseas creates a financial burden often overlooked. And when that financial burden leads to bankruptcy, special rules should apply. "
I do agree with that there are some expences that do arise on the other hand there are some that are no longer there either. Like medical insurance which is a big amount for some. As I said before I do think there should be instances where there are special rules if it is through no fault of their own. I am not only talking about military either.
I will say ther are a lot more safeguards for the military then people realize. One being the Soldiers and Sailors Act.
Wage and price controls on all parts of health care is the answer to that. Proven many times over in other parts of the world, no one has promoted it here.
Your information is flawed go to the source, do the real research.
This is a situation where we need to weigh the emotional satisfaction of being smug about being an ant and not a grasshopper against the damage to society as a whole from the present "new and improved" bankruptcy laws.
One of the ironies of the present situation is that the same people behind the new laws are some of the most predatory lenders around, e. g. MBNA. Tempt people with easy credit and then smite them. I love it.
Making debtors wear a huge, red dollar sign around their neck... while they're in stocks in the town square.
As a former financial advisor, I agree with you: Easy credit and inflated limits spelled disaster for a lot of people. Things have been wonky for awhile now, and I'm going to predict it's going to get worse for a lot of people before it gets any better.
People do crazy stuff. Part of what we need to do as a society is to admit to ourselves that they're going to continue to do it and try to plan a way to protect ourselves.
Well, it wasn't this indigent paranoid schizophrenic.
no, no, no! I try to be all thing to all people -- there's a slight difference. And I am now done with any and all thread derailment.
Really, go read the actual changes that were made back in 2005. Every consumer advocacy group railed against them. Only the banking industry was happy.
The key issue is not tightening the reigns on bankruptcy PER SE. The two major problems with the 2005 overhaul were
A: no exemptions for situations that were no fault of the filer (natural disaster, medical emergencies, military call-ups, etc.)
B. No checks against the banking industry for engaging in the predatory benhavior that leads to bankruptcy filings (i.e. specifically targeting young people in college, the elderly, minority groups, etc.
Keep in mind that in only the last three years, the cost of just filling your car has tripled. I personally have seen my winter utilities bill go from $200 a month to over $500 a month. People who have been able to manage their money well in the past can't now, not because of their own bad behavior, but because incomes have not gone up to match the cost of living. Meanwhile, the banking industry slaps you with a $50 late fee for being one day late, and takes your one lateness as an excuse to jack your interest rate from 9.99 % to 24.99%. Also remember that credit card "grace periods" have shrunk from 30-32 days a few years ago to on over 20 days now. So again, people who a few years ago were able to manage just find suddenly are struggling due to a perfect storm of economic issues slapping them at once.
You make a pretty good argument. I agree with your views regarding the overhaul. But as far as sympathising with those that extended their credit beyond the energy rise....... No dice. I am paying the same prices as everybody else. I didn't extend my credit, even though I could have, and lived larger but I didn't. Why should those that did live larger than me making the same money get a free pass just because they were greedy and didn't anticipate market swings? They thought they were better than me back in the good old days and now I am supposed to feel sorry for them and support bailing them out? Like I said.....no dice.