There was an interesting proposal to dramatically change the bankruptcy system in the New York Times last week. Ronald Mann, a Columbia Law School professor, complains that the existing bankruptcy system is overly complicated and expensive for individual filers. He advocates that Congress revamp the system to make bankruptcy a simpler and more affordable option.
Mann lays substantial blame on Congress's bankruptcy 2005 reforms, which implemented a number of procedural safeguards to prevent bankruptcy abuse but have had the effect of increasing the cost and time of filing. Potential filers have had to produce a flurry of paperwork about assets, income, and expenditures. The added paperwork has caused more reliance on lawyers, which has significantly raised the cost of filing.
Mann is also critical of a loophole that has existed in the Bankruptcy Code since 1978. When a homeowner owes more on his mortgage than the home is worth, the bankruptcy judge may not convert any excess owed into unsecured debt. A judge can make such a conversion with second mortgages and vehicles.
Mann proposes a two-tiered system that would allow filers without substantial income or assets to file a simple form that would not necessitate more than basic information. Within a few days of filing the form, a debtor's unsecured debts would be wiped away, without the need of bankruptcy hearings. The legal process and more detailed paperwork would be necessary for debtors with assets and income in order to assess the debtor's responsibility.
There is certainly a lot of waste in the bankruptcy system. Revamping the entire system would seem to be a pipe dream because it is very politically unpopular to support a measure that can be construed as making it easier for people to file bankruptcy. A year ago, there was buzz that Congress would repeal the exception discussed above and would allow bankruptcy judges to write-down mortgages. That never happened even when the housing crisis was at its worst, and as the economy has picked up it will be more difficult to pass bankruptcy reform. Mann's proposals are important, however, if only because they highlight how the system could operate much more effectively for people in need.
