An article published yesterday on CNBC’s website titled “Puerto Rico needs reform, not bankruptcy protection” discusses the non-bankruptcy changes that Puerto Rico can take to financially stabilize its government.
While it would be unfair for me to discuss Puerto Rico’s finances, as I am not familiar with the subject, it does bring up the topic of the stigma that is attached to bankruptcy filers. Some will argue that all that is needed is for a debtor to take some changes to their finances in order to pay their debts, rather than file bankruptcy.
As a bankruptcy attorney, I can affirm that most of my clients need to make changes in order to avoid going into further debt. Some individuals need to obtain auto insurance to avoid liability under Michigan’s no fault statute. Others need to avoid co-signing on debts for family members or friends with poor credit. Others need to obtain health insurance to avoid the rising health insurance costs. Still others need to revise their budget and get better control over their spending to live within their means.
Most bankruptcy attorneys can tell you that even when potential bankruptcy filers make needed changes, they are still unable to pay the debts that are already incurred. The bankruptcy process under Chapter 7 only works when the debtor and the bankruptcy attorney are able to show the court that there is no money left over after all normal monthly expenses to repay the creditors. If it were the case that as a matter of budgeting, the bankruptcy debtor did have a significant money left over each month, the bankruptcy attorney would be required to advise that a Chapter 13 would be the best option. So despite the stigma, Chapter 7 bankruptcy really is for those who cannot pay on their debts.
Under Chapter 13 bankruptcy, debtors repay their debts at an amount they can afford based off of their budget drafted with aid of their bankruptcy attorney. A bankruptcy debtor does benefit from having the automatic stay to avoid any repossessions, foreclosures, or lawsuits during the bankruptcy, but loans are repaid.
For either of these options to work, a bankruptcy debtor must work with his/her bankruptcy attorney to craft a budget that is affordable and will avoid future debt. The debtor must stick with this budget moving forward or else any work by the debtor and bankruptcy attorney may be jeopardized.
The long term benefit of bankruptcy, only takes hold if the bankruptcy attorney and debtor are on the same page and the debtor takes real steps to make those changes so no new debt arises.
Puerto Rico’s government needs to focus on reform, not on convincing Congress that it should have access to bankruptcy protection to discharge the island’s debts.
Members of Congress like Senators Orrin Hatch and Chuck Grassley have expressed doubts over bankruptcy’s efficacy. There’s a good reason to be skeptical.
Chapter 9 bankruptcy isn’t the panacea its supporters would like us all to believe. It’s not fairer. It’s not more orderly. It’s not going to protect taxpayers on the mainland or on the island. And it’s definitely not going help the island correct years of government mismanagement.