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Bankruptcy overhaul may spur more filings

BY BRIAN TUMULTY
GANNETT NEWS SERVICE

WASHINGTON - April 11, 2005 - Bankruptcy attorneys will soon flood the television airwaves urging people to file for bankruptcy protection, predicts one consumer advocate.

The reason: a sweeping overhaul of the rules governing personal bankruptcies, which will make it harder for individuals to walk away from their debts, is expected to take effect in October.

After eight years of roadblocks, impasses and a veto by President Clinton in 2000, legislation sought by the credit card industry and opposed by consumer groups is expected to become law later this month.

The House is expected to vote next week on a Senate-passed bill that can be sent directly to President Bush for his signature. Both of Florida's senators, Bill Nelson, D-Melbourne, and Mel Martinez, R-Orlando, voted in favor of the overhaul.

Because the law won't take effect until 180 days after Bush signs it, Kathryn Crumpton, manager of Consumer Credit Counseling Service of greater Milwaukee, said she's worried.

"Part of me is concerned we'll see an awful lot of attorneys on TV saying, 'Hurry up and file before the new law takes effect,' " said Crumpton. "And then we'll have this big rush of bankruptcy filings."

Debt-laden consumers, knowing the bill is likely to become law, aren't necessarily waiting for ads to urge them to see lawyers, said Dennis Abraham, a Melbourne lawyer who handles bankruptcy cases. "I know in the last three weeks I've gotten very busy and I don't expect it to let up in the next six months."

Business groups that lobbied for the bill are eager for it to become law.

"The bill is way, way overdue," said Mallory Duncan, senior vice president and general counsel of the National Retail Federation. "Bankruptcies are continuing to skyrocket."

Besides credit card issuers, department stores, appliance stores and furniture retailers that extend credit to their customers are among the beneficiaries of the legislation.

Number doubles

About 1.6 million Americans filed for bankruptcy protection last year, about double the number who did a decade earlier.

Most bankruptcies involve people who have high medical bills, have gone through a divorce or have lost jobs.

"I think it is misguided," Abraham said of the legislation. "The majority of the people I see are in dire circumstances through no fault of their own."

Susan Morley of Manitowoc, Wis., who filed for bankruptcy protection in 2002, said she did it because her situation was worsening with a collection agency pursuing an $8,000 medical bill that originally was $3,000. Morley's ex-husband had agreed to pay the bill as part of their divorce in 2000, but he moved to another state and she became liable for the payment.

"You can never get out of debt when it comes to a collection agency," said Morley, who was laid off from her job several months after emerging from bankruptcy. She's now collecting unemployment checks of $270 a week, attending classes to become a certified medical assistant and hoping to begin paying off a recent hospital bill of $2,000 when she gets a job.

"My experience is that the minute you get out of bankruptcy you are a better credit risk than you were the day before because you have no debts," said Walter Dartland, president of the Consumer Federation of the Southeast based in Tallahassee.

Dartland said fewer debtors will get that fresh start under the new law.

Many filers still will be able to walk away from their debts under Chapter 7 of the bankruptcy code as long as they are willing to liquidate all but a few key possessions.

However, more will be forced into Chapter 13 where debtors must repay part of their debts in exchange for keeping a house, a recently purchased vehicle and other household property.

"The reform act is going to cause a very large number of people to file for Chapter 13," said David J. Volk, a Melbourne bankruptcy attorney.

And the Chapter 13 repayment rules will be tougher:

A debtor who purchased a car for $20,000 that is now worth $15,000 is only obligated to repay its $15,000 repossession value under the current law. The new law calls upon a debtor who still owes $18,000 on the car loan to repay the full amount in order to keep the vehicle.

Debtors whose income is above the state median income will be required to repay their creditors during a longer period -- five years instead of three -- and develop a household budget using Internal Revenue Service expense standards.

"Our hope is that people will use bankruptcy more judiciously, and it will go back to what it was 20 years ago where people used it truly as a last resort," Duncan said. "When the American dream crashes, you have to have something like bankruptcy as a last resort."

Eligibility denied

Consumer advocates warn some debtors will be denied eligibility for bankruptcy protection and be unable to discharge their debts under the new law.

"In some instances, they won't be able to declare bankruptcy," said Gerald Thain, a law professor at the Economic Justice Institute in Madison, Wis.

The new law will require an initial review by a credit counselor who may recommend against a U.S. Bankruptcy Court proceeding and instead advise a repayment plan.

"It's an anti-consumer law," said Thain, who observed there are no offsetting provisions for financial services firms to restrain their easy credit practices. "Credit card lending is twice as profitable than other forms of lending."

Others involved in the credit industry, though, say too many people live way beyond their means and use bankruptcy as an easy way out. Ultimately, more prudent consumers are hurt because of that, they say.

"There are consumers who are abusing it," said Pamela Hart, director of Consumer Credit Counseling Service of Brevard, a nonprofit agency that helps people deal with debt problems. "And when people are abusing something, all of us pay for it in the form of higher interest rates."

Hart acknowledged some people are driven to bankruptcy by circumstances beyond their control, such as large medical bills. Many others, though, she said, are just living way beyond their means and run up huge credit card bills to pay for such things as jewelry and vacations. "They'll say things like 'That's the only way I can I live.' And, of course, that's not true."

Avoiding bankruptcy could have advantages.

"I think there are a lot of people who aren't aware they could go through credit counseling," said Crumpton, the credit counseling manager.

Crumpton said she's seen people who went through bankruptcy to discharge as little as $7,000 or $8,000 in debts while being required to pay an attorney up to $800 plus a couple of hundred dollars in court costs. In those cases, the debtors did not know they could have opted for a repayment plan of only $100 to $150 a week.

The bottom line, however, is all consumers who file for court protection from their creditors will be required to provide more documents such as pay stubs, tax returns and an inventory of household possessions.

"It is going to be more expensive, more embarrassing and more frustrating," Abraham said.

Most filers currently pay a $209 court filing fee and $500 to $1,500 for an attorney to represent them in the simplest cases filed under Chapter 7 of the bankruptcy code, according to Henry Sommer, president of the National Association of Consumer Bankruptcy Attorneys. The filing fee will rise and attorney fees will increase 30 percent to 40 percent because of the extra paperwork, Sommer predicted.

Hart said only time will tell how the bill really affects consumers. "We'll see how the implementation goes. But I think the intention is good."

FLORIDA TODAY staff writer John McCarthy contributed to this report.