The Haven Act: A Great Law That Exposes A Really-Bad Bankruptcy Policy

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Exposed defenses at Omaha Beach (photo by Marilyn Swanson)

By: Donald L. Swanson

The Haven Act is short for: “Honoring American Veterans in Extreme Need Act of 2019.”  It is a newly-enacted law of the land.

The Haven Act does a great and valuable thing for many of our military veterans:

  • it allows middle class veterans to file Chapter 7 bankruptcy, instead of being stuck for three to five years in Chapter 13. [Fn. 1]

Why this is important requires explanation. What follows is an attempt to do so.

Some Context – A Really-Bad Policy

During its initial quarter century, the Bankruptcy Code authorized individuals, including those in the middle class of our society, to gain a fresh financial start by filing Chapter 7 bankruptcy. Many people utilized Chapter 7 because of its efficiency: from start to finish, a no-asset Chapter 7 case might last six months or so. This worked well for its intended purposes.

During that same quarter century, individuals could also file Chapter 13, instead. But Chapter 13 is anything but efficient: from start to finish, a Chapter 13 case will last three or more years. Many people chose to utilize Chapter 13, anyway.  That’s because Chapter 13 offered, (i) an opportunity to preserve a home and other assets, (ii) more favorable discharge provisions than Chapter 7, (iii) the possibility of paying attorney fees over time, instead of up-front, (iv) etc.

But then, a million U.S. citizens filed bankruptcy one year. And Congress became horrified!

Of greatest horror, to Congress, is the fact that people in the middle class of our society were filing Chapter 7:

  • “Oh, no,” Congress exclaimed;
  • “We can’t have people above the poverty line filing for Chapter 7,” Congress insisted;
  • “Those middle class people must be abusing the bankruptcy system and their creditors—surely that is their intent,” Congress wailed; and
  • “That’s way too easy and isn’t fair to credit card companies and other lenders who promote easy and expensive credit,” Congress determined.

And Congress acted on such horror-of-horrors in 2005: Congress passed the “Bankruptcy Abuse Prevention and Consumer Protection Act” (aka, “BAPCPA”). In doing so, Congress enacted some really-bad policies design to punish middle class debtors for their financial sins.

One of those really-bad policies focuses on keeping middle class people out of Chapter 7 and forcing them into Chapter 13.

  • It is this really-bad policy of keeping middle class people out of Chapter 7 that the Haven Act rectifies for military veterans.

The Haven Act Exposes How Objectionable the Really-Bad Policy Actually Is!

It’s great that our military veterans will be able to file Chapter 7 bankruptcy, despite qualifying as middle class people. It really is!

But the need for getting rid of the really-bad-policy is not limited to our military veterans. Every consumer debtor needs a Chapter 7 option. Here are some reasons why.

–Debtors should not be presumed dishonest

One of the great things about enactment of the Bankruptcy Code, back in 1978, is this: it flipped the presumption about debtors.

  • Prior to the Bankruptcy Code, individual debtors were presumed to be dishonest—and there was no opportunity to show otherwise;
  • The Bankruptcy Code flipped that presumption in 1978—individual debtors were presumed to be honest and deserving of bankruptcy protection and relief, until evidence showed otherwise; but
  • In 2005, Congress flipped the presumption for middle class people back to dishonesty and abuse in Chapter 7, with no opportunity to show otherwise—can’t even negotiate or mediate something different.

The need for the Haven Act exposes the objectionable character of the 2005 change. And the same change is needed for everyone else in our middle class.

Consider, for example, people who suffer financial loss because of illness, injury, job loss, a depressed economy, or other misfortunes. Where does Congress get off presuming such people to be dishonest and abusive to the bankruptcy system?!

–Honest and deserving debtors should not be punished

Pushing middle class people out of Chapter 7 and into Chapter 13 is designed for one purpose and one purpose alone: to punish the person who files bankruptcy.

The reality is this, (i) a three to five year payment plan usually provides little-to-no dividend to unsecured creditors—rarely more than a Chapter 7 would provide, and (ii) is a near-assurance of failure in the bankruptcy (the debtor must survive financially for several years without a rainy-day fund).

The purpose and reality of the really-bad policy isn’t to maximize returns to creditors—that doesn’t happen. And the purpose isn’t to provide an opportunity for a successful fresh start. No. No. No! The purpose and effect of the really-bad policy is to require a few years of penance and punishment for middle class people who file bankruptcy.

But what about the honest-and-unfortunate person who becomes ill, or loses or job, or is affected by a depressed economy, or faces some other misfortune that’s imposed upon him/her?

  • Shouldn’t this person be entitled to an efficient fresh-start process?
  • Why subject him/her to a three to five year period of penance and punishment?

–Providers of easy and expensive credit are undeserving of special protections under the Bankruptcy Code

Why Congress chooses to protect the purveyors of easy and expensive credit, at the expense of honest-and-unfortunate debtors, is a mystery.

Why should a business that solicits users of its high-interest credit cards be entitled to tough benefits under the Bankruptcy Code? If such creditors don’t want to lose that money, don’t extend the easy credit! It’s as simple as that.

Congress should not be giving tough bankruptcy protections to the providers of easy and expensive credit!

Conclusion

It’s great that the Haven Act is now the law of the land. And here’s a huge shout-out to all who worked hard to make it happen—congratulations!!!

But an effect of the Haven Act’s enactment is this: it exposes the objectionable character of a really-bad policy enacted by Congress in 2005.

Every person in our entire middle class, here in these United States, should be entitled to the same bankruptcy benefits and protections as those below the poverty line. They should not be subjected to Congress’s 2005 idea of punishment and penance.

The Haven Act’s benefits need to be extended to all middle class people in these United States!

———————————-

Footnote 1: The Haven Act excludes veterans’ benefits from the calculation of “current monthly income” under 11 U.S.C. § 101(10A); and “current monthly income” is used to calculate the “means test” for Chapter 7 eligibility under 11 U.S.C. § 707(b)(2)i.e., a consumer’s income had better be pretty-darn-close to the poverty line, if he/she wants to file Chapter 7.

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