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Thursday, April 21, 2005

Breaking the Bankruptcy Law

Thinking about filing for bankruptcy? If so, you might want to consult a lawyer soon because yesterday President Bush signed a major overhaul of the nation's bankruptcy laws -- changes that will take effect in six months.

The new law is designed to require more people who seek bankruptcy protection to repay a larger portion of their debts. Some debtors will no longer have the option of choosing Chapter 7 bankruptcy, which allows a person to wipe out most of his or her debt. Instead, those debtors will be required to file under Chapter 13, which requires repayment of a portion of the total debt.

While I know a lot of people think folks who file for bankruptcy are "morally bankrupt" for stiffing their creditors, the ability to escape from a major debt load is not something to be tossed aside lightly. Debtor's prison isn't the answer either, although some readers seem to think that we should revive that institution.

Some people just need a fresh start, and our bankruptcy laws were written, to a large degree, to provide a break to the debt-laden. Cases of serious abuses of the bankruptcy laws are rare. It's more often the case of people sidled with massive debts after a sudden change in their life -- loss of health insurance, a layoff, etc.; and despite what the proponents of this new law claim, most people filing for bankruptcy are doing so as a last resort.

Newsweek's Jonathan Alter put it best when he wrote of the bankruptcy changes: "[T]his bill, like so many others moving through Congress, comforts the comfortable and afflicts the afflicted. Worse, it provides for no distinction between those who get unlucky in Las Vegas and those who get cancer. The law was literally written by the credit-card industry, the same folks whose siren-song targeting of high-risk borrowers caused much of the bankruptcy problem in the first place. First Congress puts a half trillion in budget deficits a year on the plastic for our grandchildren to pay off. Then it sells out the average American to predatory lenders, who have the run of the place. History should remember the 109th as the Credit Card Congress."

Amen to that.

For highlights of the new bankruptcy law, read these Washington Post articles:

* "Bankruptcy's Next Chapter" by Kathleen Day and Caroline E. Mayer.

* "Bankrupt and Swamped With Credit Offers" by Caroline E. Mayer

* Also, check out this news graphic highlighting the difference between Chapter 7 and Chapter 13 bankruptcy and what would change under the new law.

Readers Weigh in on Bankruptcy Reform

My mailbox has been filling up with readers' messages on the bankruptcy changes. Here are just a few comments:

* Jack Whittier of Rochester, N.Y., didn't agree with my strong stance against the legislation. Whittier wrote: "One of my fears for our future economy is that people continue to pile up excessive amounts of debt [and] don't save enough. Eventually, it will come back to hurt them and our country's productivity."

* Terry Mayfield of Valencia, Calif., wrote: "You say that many bankruptcies are due to divorce, major illness or job loss. These are not excuses to avoid debt. Responsible people are not one paycheck away from disaster. They have a savings plan, and don't spend everything they make each week. Let those who create the problem bear the burden of their deeds."

* Alan Kabakoff of Calabasas, Calif., put much of the blame right where it should be: "Lenders know the risk they take lending money to sub par borrowers. These lenders profit handsomely from the risk. The risk however needs to remain with the lender. If lenders want to reduce their risk of loss, raise the lending standards. If lenders want to earn extraordinary profits, and are willing to take a risk with marginal borrowers, it is their own risk. Amending the bankruptcy laws to remove the lenders' risk is simply a step closer to debtor's prison and loan sharking."

* Warren H. Heilbronner, a Chapter 7 bankruptcy attorney from Rochester, N.Y., commented on my column last month about the law's credit-counseling requirement. Heilbronner wrote: "Although credit counseling is very important, I believe that the provision as it is written in the law is absolutely worthless. In only a handful of cases will the counseling deter a debtor from filing. By the time debtors get to that stage, they just want to file and get it over with and what is said to them will go into one ear and out the other."

* Bob McCabe of Galloway, N.J., wrote: "It's shameful that people in this country have to file for bankruptcy because of medical reasons. These people have paid high taxes -- federal, state and local -- for years, but the government has failed to even provide limited, catastrophic coverage. And though many of these people also carry health insurance, it's not sufficient. This is a government of big business, by big business and for big business and its rampant greed. There is so little balancing of the diverse interests in this country anymore."

* Jim Magee from Round Lake, Ill., wrote: "While the system could use some polishing, what is being proposed is a monumental bait and switch, with credit card companies getting a back-door windfall at the expense of our society's most needy."

Changes in Government Bonds

Are you a bond man or woman? And I'm not looking for 007 fans.

If you like the safety of government bonds, read Albert B. Crenshaw's column from this past Sunday -- "Losing Interest in EE Savings Bonds."

The Treasury Department is going to begin locking in current rates on buyers of new Series EE bonds. As Crenshaw reports, the latest change, effective May 1, while simplifying Series EE bonds, makes them considerably less appealing in the current low-interest-rate climate.

If you're still interested in investing in savings bonds but don't like the change for the Series EE, there are other choices. In a column I wrote two years ago -- "Treasury Offers Options for Less-Than-Adventurous Investors" -- I highlighted two inflation-indexed securities offered by the U.S. Treasury: Treasury Inflation-Protected Securities and I Bonds. Both bonds are geared toward investors who want inflation protection but want to keep their risks low.

359 Days and Counting

I just know you are already working on your 2005 tax return, right? That's right I said 2005.

The truth is, we all should be working on our 2005 tax situation right now. In that vein, read today's Color of Money column, which discusses various tax changes for this year. Here are a few:

* IRA contribution limits increase to $4,000, up from $3,000 in 2004. If you're 50 or older there's a $500 catch-up contribution, so you can put away $4,500.

* Simple IRA contribution limits increase to $10,000, up from $9,000 in 2004. Catch-up contributions increase to $2,000, up from $1,500 in 2004.

* 401(k), 403(b) and 457 plan contribution limits increase to $14,000, up from $13,000 in 2004. Catch-up contributions increase to $4,000, up from $3,000 in 2004.

You might also want to check out Dan Oldenburg's Consummate Consumer column from Tuesday, in which he discusses just how long you should keep all those receipts and other financial records on file -- "After April 15, Managing Your Own Paper Trail."

E-mail your comments and questions to singletarym@washpost.com. They may be used in a future column or newsletter with the writer's name unless otherwise requested.

Brush Up on Your Tax Facts to Save More Next Year
Have you recovered from filing your 2004 tax return? If so, get busy preparing for next year.
 Read More Color of Money Columns
 The Color of Money Book Club

After April 15, Managing Your Own Paper Trail
With last week's tax filing deadline past -- and that box of canceled checks, pay stubs and other records probably still cluttering the house -- it's time to consider the fate of your paper trail.
 Read More Consummate Consumer Columns

Bankrupt and Swamped With Credit Offers
When Chapter 7 filers wipe out their debts, card firms jump to offer them new credit cards. Under a new bankruptcy law these offers are likely to increase.
 Bankruptcy Bill Passes; Bush Expected to Sign (The Washington Post, 4/15/05)
 News Graphic: The Difference Between Ch. 7 and Ch. 13 Bankruptcy, and What Will Change Under the New Bankruptcy Bill.

Applying Buffett's Approach
William Nolin added to his Principal MidCap Fund's second-largest holding, Gentex Corp., after the shares dropped last year. He cited Warren E. Buffett's strategy as the inspiration for the purchase. "Buffett's thinking is the stock price will follow a good business," Nolin, who personally owns shares of the billionaire investor's Berkshire Hathaway Inc., said during an interview in New York. "We look for the best businesses in an industry at a good bargain."
 Profile: Principal MidCap Fund
 Fund Managers: Value-Adding Experts or Mere Commodities? (The Washington Post, 4/17/05)
 First Quarter Mutual Funds Report
 Best Performing Funds of 1st Quarter
 Worst Performing Funds of 1st Quarter
 Biggest Funds in the 1st Quarter
 Research Mutual Funds

Losing Interest In EE Savings Bonds
Perhaps drawing a lesson from homeowners who have refinanced to lock in today's low interest rates, the Treasury Department has announced it is going to begin locking in current rates on buyers of new Series EE U.S. Savings Bonds.
 Sunday Business: Preparers Moving to Tax-Refund Debit Cards
 Read More Cash Flow Columns

In Real Estate Fever, More Signs of Sickness
Matt Marshman watched it happen in one Germantown neighborhood in February. Each house that went up for sale cost about $15,000 more than the last. And the houses were all very much alike.

Study Shows Loan Brokers' Better Side
For years, mortgage brokers, who originate more than half of home loans, have been targets of criticism from federal agencies and consumer advocates.
 Housing Counsel: Late Payments Don't Always Spell Doom for Homeowners
 2005 Housing Outlook Special Report

Rising Consumer Prices Outpace Gains in Wages
Consumer prices rose in March at the fastest rate since October, outpacing gains in most workers' wages, as households paid more for energy, clothing, hotel rooms, medical care and other items, the Labor Department reported yesterday.
 Economic Worries Aren't Resonating on Hill (The Washington Post, 4/21/05)
 Post-ABC News Consumer Comfort Index


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