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Jury is still out on new bankruptcy law
Honest people may be getting caught in reform's wide net
Posted by the Asbury Park Press on 02/12/06
BY JENNIFER BROOKS
GANNETT NEWS SERVICE
THE NATION'S tough new bankruptcy law is taking a harsh toll on the
bankrupt - and the banks.
Congress rewrote the law last year to impose new legal hurdles on those
trying to wipe away their debts in bankruptcy court. The law was intended to
sweep tens of thousands of people each year into repayment plans. Banks and
credit card companies lobbied long and hard for the new law, expecting to
recover millions.
It hasn't worked out that way so far.
The new law touched off a rush to bankruptcy court. Half a million Americans
filed for bankruptcy protection in the two weeks before the law took effect
Oct. 17.
The wave of filings put a massive dent in the fourth-quarter earnings of the
companies that had lobbied hardest for bankruptcy reform. Bank of America
reported $320 million in bankruptcy losses, JPMorgan Chase & Co. predicted
fourth-quarter credit card defaults would top $2.3 billion. Discover Card
lost $180 million.
It was a one-time hit for the credit card giants, which expect to more than
recover their losses over the long term.
"We anticipated that there would be a spike in bankruptcy filings when the
law went into effect," said Laura Fisher, spokeswoman for the American
Bankers Association. "But we anticipate fewer bankruptcy filings in the
future. This law will be targeting people who were getting away with
bankruptcy murder by discharging bills they could pay."
After a brief lull, bankruptcy courts are beginning to fill again with
people like Alfonso Sosa, a house painter and father of three from
Fredericksburg, Texas. The changes in the bankruptcy law may cost him his
home.
"I've never, ever in my life been to court," said Sosa. "We're praying we
can keep (the house). I just want to get to a place where I can start paying
them what I owe."
Sosa, who earned $20,000 last year when painting jobs were few and far
between, filed for bankruptcy on Dec. 6 to avoid foreclosure on his home.
The old law would have shielded his family from eviction.
But Sosa missed a key step in the new system. He failed to spend a few hours
talking by phone with a credit counselor before heading to court, which left
federal bankruptcy court Judge Frank Monroe with no choice but to dismiss
his plea for bankruptcy protection.
"Congress must surely be pleased," Monroe wrote in a scathing ruling. "The
parties pushing the passage of (the bankruptcy) act had their own agenda. It
was apparently an agenda to make more money off the backs of the consumers
in this country."
The credit counseling requirement was one of the changes Congress hoped
would steer debtors away from bankruptcy court entirely.
"Unfortunately, the people we've been seeing for prefile bankruptcy
counseling are at the point where they really have no other option," said
Jim Godfrey, executive vice president for the Consumer Credit Counseling
Service of Maryland and Delaware, a federally approved bankruptcy screening
center.
Godfrey said many of the people calling in for advice are so down on their
luck, the counseling service waives the $50 consultation fee.
Sosa spent the required few hours talking by phone with a credit counselor,
who confirmed that he had no other option but to declare bankruptcy. With
the threat of foreclosure still looming, he refiled in Monroe's court in
Austin, Texas.
Unfortunately, as Monroe also pointed out in his ruling, filing for
bankruptcy more than once in a 12-month period puts Sosa at risk of being
labeled a "bad faith" filer subject to criminal penalties.
Two million people filed for bankruptcy in 2005 - one out of every 53
households in the United States, according to estimates by Lundquist
Consulting. The most common reasons cited were catastrophic medical bills,
job loss and divorce.
The new law tightens standards for people attempting to file for Chapter 7
bankruptcy, which is set up for people who fall so deeply into debt they
have no hope of repaying what they owe. Debtors turn over a portion of their
assets and in return, their debt is wiped away.
The new law tightens the standards for this category and is expected to
sweep an estimated 30,000 to 100,000 people a year into Chapter 13
bankruptcy instead. In Chapter 13, debtors are put on a repayment schedule
and their wages are garnisheed to repay as many creditors as possible.
Bank credit card companies spent millions of dollars to lobby for the
change.
Leading the lobbying campaign was Delaware-based credit card giant MBNA,
which estimated in 2000 that tightening the bankruptcy regulations would
save it more than $60 million a year.
Before the law took effect last year, MBNA was bought out by Bank of
America. Now, Delaware bankruptcy attorney Cynthia Carroll said, some of her
newest clients are laid-off MBNA employees. The company is expected to lay
off thousands more over the next few years.
"We've seen the first wave of the MBNA casualties," said Carroll, who
practices in Newark, Del. "I think it's going to be harder for them under
this new law."
Supporters of the law want to wait and see if it achieves its goal of
avoiding needless bankruptcies.
"It's still too early to say exactly how the new law is working," Sen. Tom
Carper, D-Del., one of the co-sponsors of the bankruptcy bill, said in a
statement. "Congress will continue to monitor the situation to make sure
that those people who need relief get it and those who can repay some of
their debts get the financial counseling they need to leave the system in
better shape than they started."
Jennifer Brooks, jabrooks@gns.gannett.com