Bankruptcy

Bankruptcy Code 502(k): stupidest consumer protection ever!

By David Leibowitz, Illinois and Wisconsin Bankruptcy

You really have to hand it to Congress. When they want to protect the consumer they really know how to do it. Remember how the Bankruptcy Abuse Prevention Consumer Protection Act was supposed to protect consumers? Yeah, right! For the past five years, I’ve been looking for any evidence of consumer protection in this Act.

I found one section which gives the slightest hint of consumer protection. But it’s so stupid, its not even funny.

Here it is. Section 502(k). We’re going to examine it, explain it and ridicule it.

A debtor can object to claims. But it only makes sense for a debtor to do so in a chapter 13 case when he is paying 100% of his claims under a plan. Otherwise the debtor has no economic stake in doing so.

If the debtor objects to the claim under section 502(k), the claim can be reduced by no more than 20%. So of the debtor does object to a claim under this section, there’s not so much in it for him. It will cost attorneys fees and not provide that much benefit.

The basis of the objection is that the “creditor unreasonably refused to negotiate a reasonable alternative payment schedule proposed on behalf of the debtor by an approved nonprofit budget and credit counseling agency. So let’s see. You’re thinking about filing a bankruptcy case. You get credit counseling. Your credit counselor says, “hey, we could make a budget for you”.

You then call up your friendly credit card company and say “hey, Hummingbird says I can pay you off in 12 years if you reduce my interest rate to 6% so how about it?” Your friendly credit card company is supposed to say “OH YES, THAT”S GREAT, SIGN US UP!!!” More likely, you’ll hear “press 8 for more options”.

But there’s more!! To get the benefit of section 502(k), you’ll have to make the offer at least 60 days before your bankruptcy case and offer to pay at least 6o% of the debt over a period not to exceed the repayment period of the loan or a reasonable extension thereof.  Whatever that means!!

And still more!! No part of the debt under the alternative repayment schedule is non-dischargeable. So you’ll need to consult with a bankruptcy lawyer in advance to even consider taking “advantage” of this fabulous offer.

Adding Insult to Injury. As if this consumer protection were not insipid enough, Congress mandated that you have to prove all of these elements by “clear and convincing evidence” and that the “alternative repayment schedule” was made at least 60 days prior to your case. And you don’t get attorney’s fees if you win, so any savings is lost by the cost of pursing this “benefit.”

Guess what! There are no known instances of relief under section 502(k) of the Bankruptcy Code. And there never will be. This is a cynical effort to keep people out of bankruptcy another 60 days during which they will be further harassed by creditors who will try to extract a few more dollars from them.

Tell your Congressman that if this is his idea of consumer protection, he should be ashamed of himself. Find out how much in contributions he’s received from big banks too while you’re at it.

Full post as published by Bankruptcy Law Network on February 16, 2010 (boomark / email).