Effect of the New Law -- boom or bust?

Claims that many consumers will no longer have the safety net of bankruptcy once bankruptcy reform goes into effect may be unfounded.A study by the leading provider of bankruptcy preparation software for attorneys indicates that at least 85% of debtors who file for bankruptcy under Chapter 7 would still be eligible for Chapter 7 when the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 goes into effect on October 17.Best Case Solutions, Inc., based in Evanston, IL, analyzed data from over 11,000 actual bankruptcies filed in 45 states between June 15 and July 6, 2005. The study compared each debtor's monthly income as reported in Schedule I of the petition with the state median for his household size, using inflation-adjusted 2003 Census Bureau statistics as the new law requires.85.6% of the Chapter 7 filers in the sample had incomes below the state median, and would likely still be able to file Chapter 7 under the bankruptcy reform law. The remaining 14% would have to submit to a means test in order to file Chapter 7. The information that will be required for the means test is not currently collected in bankruptcy filings, so it was impossible to ascertain how many of that group of debtors would go on to pass the means test.The data also show that 73% of current Chapter 13 debtors' incomes were below the state median. In general, debtors choose Chapter 13 over 7 if they have equity in real estate, since in most states laws exempt only a small amount of the debtor's equity in a home."The data back up what bankruptcy attorneys tell us about their clients: these are not wealthy people trying to scam the system. They're people who are overextended, sometimes due to job loss, car accidents, divorce, or medical problems, and they often have high interest rates on car loans and credit cards that make it hard for them to ever get back in the black," says Lucinda Fox, company spokesperson at Best Case Solutions. "Since most debtors have incomes below the median, bankruptcy will continue to be an option for the vast majority of them. When the dust settles, I don't think you're going to see the bankruptcy rates go down dramatically."____________________IRS TAXPAYER ADVOCATE RELEASES REPORTJuly 8, 2005IR-2005-71 WASHINGTON — National Taxpayer Advocate Nina E. Olson has delivered a report to Congress that discusses the central role taxpayer service plays in facilitating voluntary compliance with our tax laws and cautions that excessive focus on enforcement at the expense of taxpayer service could have the effect of both reducing voluntary compliance and alienating taxpayers.The Advocate’s report, which is required by law, urges the IRS to focus more broadly on steps to increase voluntary compliance. “Today, the IRS’s explicit and primary focus is on increasing its enforcement activity. While this goal is laudable, it is very narrow,” Olson writes. “As Congress noted in RRA 98, the IRS is far more than an enforcement agency — it must serve all taxpayers. Thus, the IRS should specifically state that its primary organizational goal is to increase voluntary compliance.”1. Private Debt Collection Initiative. In the American Jobs Creation Act of 2004, Congress granted IRS the authority to use private debt collectors to collect certain tax debts, and the IRS is working actively to develop and implement the initiative by early 2006.2. Collection Due Process (CDP) Hearings. CDP hearings afford taxpayers a meaningful opportunity to be heard about certain issues, including collection alternatives, between the time the IRS places a lien on the taxpayer’s property and the time the IRS can levy on the property. While many taxpayers use the CDP process for the reasons intended, some taxpayers seek CDP hearings simply to delay the collection process. Olson expresses concern that steps under consideration by the IRS to address CDP abuses may have the effect of impeding legitimate uses of the process.3. Offer-in-Compromise (OIC) Program. The OIC program allows the IRS and taxpayers who are unable to pay their tax liabilities in full to reach agreement on the amount the taxpayer is able to pay and allow the taxpayer to make a fresh start. The OIC program is designed to improve compliance. Research indicates that the IRS only collects 13 percent of tax debts that are more than two years old. By contrast, accepted offers bring in 16 percent of tax debts owed, and a recent study showed that about 80 percent of taxpayers whose offers are accepted remain in compliance during the subsequent five years.