on the Bankruptcy Soapbox

At a hearing on the effect of the bankruptcy “reform” bill held in the Senate right after the fall elections, the American Bankers Association piously testified about the care with which its member banks solicit new credit card accounts. The blame for debt that a consumer could not repay was not, they recited, the result of careless or over aggressive lending practices.

This was the chorus that lead to the enactment of the ill titled Bankruptcy Abuse Prevention and Consumer Protection Act in April, 2005. Consumers, they said, were responsible for taking on more credit than they could handle and were calculating in using bankruptcy to escape repayment. The door to bankruptcy relief must be narrowed, they said, and thus we have bankruptcy “reform”.
In February, 2007, CardTrak reported that since bankruptcy reform, credit card companies sent out 8 billion card solicitations, up nearly 1.5 billion over the number send in 2005. I don’t think it overly cynical to say that banks are rushing in to sell more of a highly profitable credit product, secure in the knowledge that the traditional safety valve for the consumer found in bankruptcy had been plugged.

Jed Berliner at Bankruptcy Law Network says he’s getting fewer credit card solicitations in his mail. I, however, have been saving the credit card solicitations sent to my two college aged sons, both of whom are full time students without meaningful employment. They get on average a solicitation a week from one aggressive lender or the other, promising 0% interest, no annual fee, a “confirmed offer.”

I find it hard to construct a portrait of “responsible lending” from these pieces.

Chip Parker and I have been writing about bankruptcy issues for the self employed over on the BankruptcyLawNetwork.
Chip pointed out that the bankruptcy of the shareholder does not protect the operations of a corporation that the debtor owns, since the corporation is not in bankruptcy, the shareholder is.
The flip side of that proposition is that since the incorporated business is not in bankruptcy, it can usually proceed to operate through the bankruptcy of its shareholder. After all, it is a separate entity, distinct from the owner of the stock.
When a small business is a proprietorship, the assets belong to the owner and are part of the owner’s bankruptcy estate when the owner files for debt relief. The trustee may want the business to stop operating 1) so it does not incur more operating debts; 2) so that the trustee is not liable for any tort claims that arise after the commencement of the bankruptcy; and 3) so the assets can be preserved and accounted for.
I have frequently advised clients with an operating business or professional practice that they want to continue to run post bankruptcy to incorporate before filing. In that manner, they draw a circle around the business assets and create a separate legal “person” who is not in bankruptcy. It shields the trustee from the concerns set out above and allows the debtor to continue to work.
If the stock in the corporation has non exempt value on the open market, the debtor may buy the stock from the trustee. Most small businesses however have little value if the owner were to stop working in the business. Trustees frequently abandon such assets as having insignificant value for creditors.