Blog sponsored by Bankrupt-Law.com



The most dire predictions haven't come to pass. Consumers are still filing
for "fresh starts." But doing so costs more and takes more time.
By Jeanne Sahadi, CNNMoney.com senior writer
October 5 2006: 5:28 PM EDT


NEW YORK (CNNMoney.com) -- When the new bankruptcy reform law went into
effect a year ago, there was no shortage of nightmare predictions.
Consumer advocates and bankruptcy attorneys predicted it would make filing
more onerous, force people to repay more of their debts even if they
couldn't afford to, and discourage consumers from pursuing bankruptcy
altogether.
Travis Plunkett, the legislative director of the Consumer Federation of
America, predicted, "The new bankruptcy law will keep many Americans who
need a fresh financial start in bankruptcy from receiving it."
Critics also said the credit card companies -- strong proponents of the
legislation -- would make out like bandits.
Plunkett and bankruptcy experts say it's too early to assess with certainty
the full effects of the new law, in part because lawyers and the courts are
still figuing out how to use the law and because the number of filings this
year is abnormally low given the record number of people last fall who filed
before the new law went into effect.
But preliminary reports indicate that those who are in dire straits still
qualify for Chapter 7, and auto lenders, not credit card companies, are
benefiting most from the bill. As for costs and hassles, however, both are
up.
Here's a more in-depth look at how three predictions have played out so far.
Prediction: It will be harder to file for Chapter 7
Reality: For some, yes
Many expected the law would make it much harder for people to file for
Chapter 7 bankruptcy and push more of them into Chapter 13 -- which under
the old law meant filers had to repay a bigger portion of their debt.
In a Chapter 7 bankruptcy, your assets (minus those exempted by your state)
are liquidated and given to creditors, and many of your remaining debts are
cancelled, giving you what's known as a "fresh start."
Filers who are unemployed, deep in debt and truly hard up are very likely to
qualify for Chapter 7 under the new law, according to California-based
bankruptcy attorney Stephen Elias, author of the "The New Bankruptcy: Will
It Work for You?" published by NOLO.
But filing for Chapter 7 may become harder for others simply because there
is now a two-part, formula-based eligibility test that must be passed,
whereas before there was none.
Essentially, "you didn't have to qualify under the old law," Elias said,
noting that eligibility for Chapter 7 used to be left to the judge's
discretion.
There are some very preliminary indications that more filers are being
pushed into Chapter 13 -- in which you must repay a portion of your debts
over five years -- because they can't pass the means test.
Over 31 percent of bankruptcy attorneys say they're seeing somewhat of an
increase (27%) or a major increase (4.5%) in clients who are forced into
filing for Chapter 13 as a result of the new qualifiying test, according to
a survey by the National Association of Consumer Bankruptcy Attorneys
(NACBA)
In years past, typically more than two-thirds of all personal bankruptcy
filings were Chapter 7. This year, Chapter 7 filings still make up the
majority, but they fell to 59 percent of all filings in the first half of
this year from 76 percent in the same period a year earlier, according to
the American Bankruptcy Institute.
John Penn, ABI's immediate past president and an attorney with Haynes and
Boone in Texas, predicts eventually there will be an even split between
Chapter 7 and 13 filings.
Prediction: Filing will be more onerous and costly
Reality: Yes
In the NACBA survey, 81 percent said there has been a major increase in the
time it takes to prepare a bankruptcy filing and 93 percent said the
increased paperwork mostly increased the costs of a case rather than
improved the results.
As a result, bankruptcy attorneys have pushed their fees up by as much as
100 percent.
Plus, a consumer's basic costs of filing minus attorney fees have almost
doubled, in part because of the new requirement that filers attend and pay
for credit counseling and money management classes, said Ike Shulman, a
NACBA board member and a bankruptcy attorney in San Jose, Calif.
End result: A bankruptcy filing that used to cost anywhere between $500 and
$1,500 on average might now cost between $1,000 to $3,500, said Elias.
But once attorneys become more familiar with the law -- and more efficient
in handling all the new procedures -- Elias predicts their fees eventually
may come down, at least for those clients who have clear-cut cases.
For consumers who can't afford an attorney and attempt to file on their own,
there is greater likelihood that their case will be dismissed. That's
because the new law imposes more rigid procedural rules and imposes a
one-strike-and-you're-out threshold for automatic dismissal.
For instance, your case will be dismissed automatically if you don't provide
by a certain date all your wage stubs for the 60 days prior to filing, Elias
said.
Prediction: The credit card companies will make out like bandits
Reality: Not in bankruptcy court
Credit card companies lobbied for bankruptcy reform so that filers who could
pay some of their debts were pushed toward Chapter 13, where they were
likely to be forced to repay at least some of their unsecured debt, such as
credit card debt.
But Elias and others are finding is that the new formula used to determine
how much disposable income a filer has to pay that unsecured debt has been
made more liberal in favor of the filer than it was originally.
That is, a consumer may end up owing nothing to the credit card company
after all his priority and secured debts are accounted for and he has
subtracted out all the allowable deductions from his income.
In addition to a more liberal formula in favor of filers, auto lenders --
another big proponent of the bill -- got a provision that allows them to
pocket what otherwise might be disposable income, Shulman said.
Say a debtor has a $20,000 car loan but his car is only worth $15,000. Under
the old law, he would have been ordered to pay back the car's value
($15,000) to the auto lender and pay the remaining part of the loan ($5,000)
to his unsecured creditors, such as a credit card provider. But under the
new law, he will have to repay the full $20,000 to the auto lender.
That doesn't mean credit card companies' victory in getting the bankruptcy
law passed was just a Pyrrhic one, consumer advocates say. To the extent
that consumers are convinced the new bankruptcy law is harsher than the old
one, they may be reluctant to file or delay filing. And that delay means
extra months of debt payments to credit card providers.