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Looming law may bring bankruptcies

By LULADEY B. TADESSE / The News Journal
03/20/2005 - With a tough, new bankruptcy law on the horizon, experts predict a rush of personal bankruptcies this year. Many bankruptcy lawyers are urging clients to file now before a tougher law takes effect that would make it difficult to wipe out personal debts.

After nearly eight years of intense debate and lobbying by consumer advocacy groups and the credit card industry, the Senate passed a bill last month designed to make it harder to clear personal debts. The bill will soon be considered by the House, where it is expected to pass and reach President Bush for his signature by April. It would take effect six months later.

Bankruptcy experts don't foresee any hurdles to the bill's passage. Lawyers already are preparing for the new law by signing up for seminars and workshops. And they are contacting clients to warn them of the potential negative impact this law would have on their ability to clear debts.

"We are sending letters to our clients saying they might not qualify once the law changes," said Erin Brignola, a Bear bankruptcy attorney, whose office works with more than 500 bankruptcy clients a year.

For the first time since the bankruptcy system was established in 1898, people seeking debt relief will have to pass a "means" test. The proposed new law is expected to prolong the bankruptcy process because it involves more paperwork and will require that debtors attend credit counseling at their own cost. Because the law expects lawyers to perform more work, including verifying clients' financial information, debtors will be expected to pay higher attorney fees.

Michael Benson, 33, of New Castle has about $30,000 in credit card debts. He has been struggling to pay his bills since 2000, but he became alarmed after hearing about the proposed new bankruptcy law on the evening news.

"Once I heard that, I said, I better go ahead and do something now before it gets too late to do anything at all," Benson said.

This week, Benson began filing a Chapter 7 bankruptcy, which would allow him to erase his debts and start fresh. He doesn't have dependents and makes about $45,000 a year as a mechanic. He likely would not be eligible to file Chapter 7 under the new law because he makes too much money. The state median income for a single man living alone is $32,203.

Under the new law, less debt can be erased under Chapter 7. A person with an income above the median in their state - $48,699 for a family of two in Delaware - who can afford to pay at least $6,000 over five years will be forced to file Chapter 13, which requires them to sign up for a repayment plan for all their debt.

Filings expected to rise

About 1.59 million individuals filed for personal bankruptcy nationwide last year, including about 3,000 in Delaware. While bankruptcies overall have declined slightly compared with 2003, credit card delinquencies started rising in the last quarter of 2004. That, combined with concerns over the bankruptcy bill, has experts projecting a sharp jump in filings this year.

"We are projecting a major rise in bankruptcy filings this year because of this new law," said George R. Yacik, vice president of SMR Research, a consumer research group based in New Jersey.

Yacik is projecting 1 million people will file in the next six months, compared with about 750,000 that normally would be expected.

Michael B. Joseph, a Chapter 13 bankruptcy trustee in Delaware, said he, too, expects an initial spike in bankruptcies that will cool off after the law is in place.

Consumer advocates contend that most people are forced into bankruptcy because of debts related to an illness, job loss and divorce.

But the banking industry says the current system is being abused by people who can afford to pay back at least some of their debts.

"This legislation brings a new level of fairness to the bankruptcy system," said Laura Fisher, spokeswoman for the American Bankers Association in Washington, which represents credit card and other banks in the nation. "It leaves the courthouse door open for people who genuinely need bankruptcy protection."

Some attorneys urge clients to wait

Even though most bankruptcy lawyers and consumer advocates say the new law would be tougher on debtors, not all are recommending immediate filing.

"If a consumer doesn't need to file for bankruptcy now, I don't think there is a need to do it now," said John Rao, an attorney at Boston's National Consumer Law Center Inc.

Vivian Houghton, a Wilmington bankruptcy lawyer, agrees.

She wants clients to wait until the president signs the bill and knows the exact date when it will become law. Filing a bankruptcy can be expensive, she said, debtors have to pay either $209 or $194 depending on the chapter they file in the court, not including the thousands dollars they have to pay in lawyers' fees.

"That is a lot of money," said Houghton, who allows her clients to include her attorney fees in the bankruptcy payment plan. "They have to pick and chose between, 'Should I pay for the groceries this month, the medical bills or the bankruptcy filing?' "

Still, there are always people who are in crisis and must file no matter what happens with the law.

Sharon Cornish of Newark had to file for Chapter 13 bankruptcy Wednesday because her house is in foreclosure and about to be sold by the sheriff.

Cornish had unexpected expenses that accumulated in the past year, which caused her to fall more than four months behind in her mortgage.

With nearly $21,000 in credit card debt and a $68,916 mortgage, she felt she had to seek relief.

"I never wanted to do this," said Cornish, 42, a nurse assistant and single mom with a 12- and 10- year-old. "Nobody wants to do this, but to save my home, this was the only way."

Contact Luladey B. Tadesse at 324-2789 or ltadesse@delawareonline.com.