Bad Credit

Cashing in on the New Bankruptcy Law

Remember “welfare queens”? That absurd image of black, inner-city, unwed mothers-purposely popping out illegitimate babies so that they could dine on filet mignon purchased with food stamps-strongly influenced the welfare “reform” debate and its pernicious outcome. The welfare-queen image was never an accurate description of the women who actually depended on welfare support, but it embodied precisely the type of simple-minded morality tale that too often drives social policy in this country. And it is happening again.

On April 20, President George W. Bush signed the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005. The Act’s proponents-mostly banks and large credit-card companies-conjured up the image of families of “mall rats,” middle-class moms, dads, and kids hitting the malls en masse and purposely maxing out their many credit cards, knowing that they could dodge the resulting debt simply by declaring personal bankruptcy and starting afresh with a new cycle of credit. This new type of financial planning, it was argued, not only hurts the lender, but hurts us all by pushing up credit-card interest rates and fees. The remedy: Find some way to stop them before they spend again!

More precisely, the Act’s remedy is to make it more difficult for individuals to declare bankruptcy under Chapter 7 of the Bankruptcy Code-under which all eligible assets are sold to pay off debt, and whatever...

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