In July, Congress approved the overhaul of financial regulations protecting borrowers against abuses in credit card, mortgage, and other types of lending. However, the new law failed to reform a 2005 bankruptcy law that hurts single mothers and benefits the credit card industry. This law makes it easier for delinquent dads to avoid paying child support and alimony.
Until 2005, bankruptcy wiped out credit card debts while leaving child support and alimony obligations intact. This helped women because their ex-husbands had more funds available to fulfill their support obligations after bankruptcy. Now the credit card debts can’t be discharged, so women find themselves competing with Visa and MasterCard for a share of their ex-husband’s paychecks. And, women don’t have the sophisticated collection departments credit card companies do.
The bankruptcy law provides a means test to determine how much income a debtor has available to pay creditors after they pay their basic living expenses. People who earn more than the median income in their states and can pay their creditors at least $6,000 spread out over 5 years are put in Chapter 13 bankruptcy rather than the traditional Chapter 7 category. Chapter 7 allows full discharge of all debts. On the other hand, Chapter 13 requires debtors to pay a portion of their credit card balances, medical bills, and other debts for 3-5 years.
The result is that divorced women are getting hit two ways by the new law — by the new hurdles it places in the way of collecting their child support payments and by their own exposure to the provisions that make it harder to completely discharge their debts.
Special hat tip to Scott David Stewart for the lead on this important issue.