Bankruptcy Reform

We've only had the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA) for three and one-half years, since fall, 2005, and already Congress is starting to think about tinkering with it. As well they should. It should never have been enacted in the first place.

BAPCPA (fondly known as Bappa-Crappa) took nearly eight years to become law. Beginning in 1996, when bankruptcy filings took off, credit card companies moaned to Congress that too many people were filing bankruptcy willy-nilly, discharging billions of dollars of debt owed to those companies. Never mind that those same companies inundate people with three, four, five or more offers for pre-approved credit cards every week. They (the credit card companies) whined that something had to be done, that bankruptcy was out of control. After being derailed by President Clinton's impeachment, George Bush's election, 9-11, the dotcom bust and a few other items, in 2005, bankruptcy reform came at last. The economy was saved.

It took about three years, until the mortgage meltdown in 2008, for Congress to start looking at the billions of dollars the credit card companies were earning, and decide that maybe something needed to be done about "excess profits". Then everyone jumped on the bankruptcy reform bandwagon. Now the mortgage lenders are the bad guys and bankruptcy needs to be reformed yet again to let borrowers modify their mortgage loans. It seems Congress will never learn. Before Bappa-Crappa was enacted, dozens of law and economics professors signed a petition urging Congress not to play with the Bankruptcy Code. After three-plus years, the almost unanimous consensus is, Bappa-Crappa has lived up to its nickname. It is a poorly drafted law that is draconian in its scope.

The pendulum swung too far in favor of creditors and now, less than four years later, we are looking at another overhaul. Once again, many are urging Congress not to allow modification of mortgages in bankruptcy because of the damage it might do to the already fragile mortgage market. Will Congress listen this time?

Obama's Budget Proposal

We got a first look at President Obama's proposed budget this past weekend. There are good and bad things in it. And a couple of really bad things.

An earlier post questioned what would happen with the estate tax, assuming it was retained and didn't expire as the Bush Administration had proposed. As expected, the Obama Administration intends to keep the estate tax. But there is a silver lining: the exclusion will remain at $3.5 million instead of reverting to $1 million as it was under President Clinton. Small business owners wanted a complete repeal, but the $3.5 million exclusion should ease some of their pain.

Also a good point is an annual adjustment to keep the Alternative Minimum Tax (AMT) from biting more people whose incomes have crept up due to cost of living increases. That's a good thing.

Tax rates in general will increase. The highest marginal rate is increasing from 35% to 39.6%. That's bad. And along with that is the ultimate "marriage penalty". These higher rates kick in at $200,000 for an individual, but $250,000 for a married couple.

Some really bad news and a surprise is the proposal to limit deductions at 28%. What this means is if you are in the higher tax brackets, a $1,000 charitable contribution, for example, is only worth $280 (28%) instead of the $396 (39.6%) of your tax bracket. This comes as a surprise and attacks a very sacred cow, that of the deductibility of mortgage interest. For years tax policy has encouraged home ownership by allowing a deduction for mortgage interest. Now that and all deductions would be limited.

It's important to remember that these are all just proposals. The President's budget has to be approved by Congress and there could be a fight to get it through.