True comedy has just enough truth in it to make it sting, and John Oliver is a master at delivering the laughs with lessons, and d’ya think that stick. The April 18, 2021 show featured bankruptcy as a central subject. An unusual topic for a comedian, yes, but one that’s very much in need of discussion.
Household debt grew significantly during the first quarter of 2021, though credit card debt dropped. That speaks of millions more ordinary Americans in desperate financial straits who have considered the impact on their credit ratings and the social stigma of bankruptcy, and out of fear, do nothing.
Right: The Working Class are Different
Bankruptcy presents more problems for the working poor and lower middle class than for the more well-off. When the filing party is a homeowner, there are protections to safeguard their home as exempt from the bankruptcy estate. In contrast, those who rent their home – people of lesser means – may not be able to persuade their landlord to let them stay in apartments when rent payments are suspended. While eviction actions can’t take place until after discharge, they often follow immediately thereafter. Finding housing with a bankruptcy on your credit report is not an easy task, especially now with so many unable to pay rent due to the COVID eviction bans.
While the wealthy and many businesses make use of bankruptcy as a matter of course, the working poor and those in poverty are often discouraged from applying in more subtle ways. Bankruptcy costs money; everyone will tell you that. For people trying to scrape up enough to feed their kids and put new tires on the car, that knocks bankruptcy right out of consideration. The most common type of bankruptcy for individuals is Chapter 7 followed by Chapter 13. Chapter 11 is more of a Chapter 13 for businesses that need to reorganize.
Right: How We Got Here
Back when wages actually paid for a family to not just survive but thrive, credit cards didn’t get much use. They were pretty tightly regulated, but as deregulation fever took hold in Washington (thanks again, lobbyists), they started to market themselves more aggressively to people whose wages were beginning to feel a little pinched.
With the new access to credit came the debt cycle – minimum payments, interest hikes, over-limit fees, late fees, and an endless cycle of making payments yet still having more debt. Understandably, during the dark days of the 1987 recession, many people cut out of this cycle by filing for bankruptcy.
The banks responded by – you guessed it – lobbying members of the House and Senate to curb ‘bankruptcy abuse’ in a 1998 bill. By then, the worst of the 1987 Recession was behind everyone – or so they liked to think. The bill made it harder for consumers to leave their debts behind.
Only one senator voted against it, the late Paul Wellstone (D-Minn) who was offended by the banks’ cash blitz lobbying effort that made sure Wall Street was heard over and above those on Main Street. In 2005, during the Bush Administration, the bankruptcy code was further amended to include a Chapter 7 means test and an in forma pauperis category where filing fees are waived for someone who can’t afford them.
Right: The Wealthy Utilize Bankruptcy as a Business Tool
The rich are different from the rest of us, and the reason for that is nothing more or less than they can afford to be. They have access to expert legal and financial advice and all manner of special breaks meant to do nothing more than to help them accrue and retain more wealth.
Even tax breaks are targeted to those who are solidly upper-middle-class – this includes tax breaks for home offices, mortgage interest deductions, and so on. Can you have a home office in a one-bedroom apartment? Yes, if you’re going to give up your bedroom or dining room. Having a home office in a four-bedroom house is a lot easier.
For the wealthy, being bankrupt does not equal being broke. All that expert advice gives ways to shield the goodies – homes, cars, art, jewelry – from bankruptcy. All too often, those goodies are protected either as assets in a business or a trust. In the case of putting the trusts in a business such as a family office, the assets belong to the business and are not part of a personal bankruptcy.
In the case of a trust, trusts are an instrument that the debtor does not directly control and is therefore exempt from being part of the bankruptcy estate. Furthermore, the rich use bankruptcy as a business tool – how’s that for abuse?
Some reasons for the wealthy filing for bankruptcy are:
- Sanitizing assets for sale. Bankruptcy can clear an asset of liens, claims, and interest.
- Reset tax liabilities. Income taxes more than three years old may be discharged, as well as hitting pause or even eliminating penalties and interest.
- Changing short-term debt into long-term debt. Credit cards have a 30-day billing cycle, whereas, in Chapter 11 or 13, these debts are paid off over three to five years.
- New capitalization or injection of liquidity. Filing for bankruptcy just before getting a big whump of funding means that the new money can’t be used to pay off old debts. It also allows the chance to accumulate capital while the automatic stay is in place.
- Stonewalling litigation. The Federal bench takes a very dim view, as in the case of the judge who jettisoned the NRA bankruptcy filings as being ‘in bad faith.’ However, bankruptcy may allow a debtor with a contested judgment to file an appeal.
- Relief from interest rates, leases, and contracts. The automatic stay stops all collection actions, giving time to renegotiate and often cram down or escape contracts.
It’s not so much that the rich are different from the rest of us; their money lets them buy better exit strategies when their debts become bothersome.
Let Van Horn Law Group Help!
You have options! We’ll work with you for your best outcome, and you may not even need to file for bankruptcy. Whatever services you need, we will make sure they are affordable to you. Get in touch with any of our offices and take advantage of a free consultation with a bankruptcy attorney.