Blog sponsored by Bankrupt-Law.com


By TOM SHEAN, The Virginian-Pilot
© March 17, 2006
Last updated: 9:22 PM

For more than a decade, Barbara Wright provided guidance to individuals with
financial problems. Last fall, her role expanded after Congress sought help
from credit-counseling organizations like hers to curb the use of bankruptcy
for wiping out personal debts.

Sxince Oct. 17, individuals planning to file for bankruptcy have had to
receive counseling from specialists like Wright, who review debtors'
situations and explain possible alternatives. The counseling requirement is
one of
several changes that Congress made with the Bankruptcy Abuse Prevention and
Consumer Protection Act of 2005.

Individuals seeking debt relief aren't the only ones having to adjust to the
new bankruptcy landscape.

Bankruptcy lawyers are wrestling with additional requirements, including the
need to document their clients' assets, debts and living expenses in greater
detail. Moreover, judges are having to resolve inconsistencies in the law.

In eastern Virginia, 14 credit-counseling organizations have been authorized
by the U.S. Trustee Program to provide pre-bankruptcy counseling. Several
organizations contacted this week said they are able to deliver counseling
the same day a debtor calls to request it. The process, which takes 45 to 90
minutes, costs from $50 to $60, depending on the counseling organization.
Credit counselors are required to waive the charge if an individual planning
to file for bankruptcy is facing financial hardship.

Wright's employer, Richmond-based ClearPoint Financial Solutions, provides
pre-bankruptcy counseling in eight states and Washington . It is one of the
few that offers counseling face-to-face in Hampton Roads ; however, very few
individuals she has worked with at ClearPoint's Chesapeake office have asked
for counseling in person. Most people, she said, want to do it by phone.

The counseling process, Wright said, requires sending work sheets and
documents to a debtor by e-mail, fax or mail and interviewing them after the
forms have been completed. The new law also mandates that individuals
complete a course in personal financial management before their debts are
discharged by the court.

For households that were behind in their mortgage payments and bills, filing
for bankruptcy had been a quick way to hold off creditors' attempts to
foreclose on a house or repossess a car. Because debtors now must receive
credit counseling before they can file, it's much more difficult for them to
rush into bankruptcy court at the last minute.

James Pedigo, a Norfolk bankruptcy attorney, said that one of his clients
contacted a credit counselor for the required pre-bankruptcy counseling only
to be told there would be a five-day wait. "I'm still having some problems,
but credit counselors are becoming more responsive," he said.

A Chapter 7 filing enables someone to gain a fresh start by wiping out all
or most of his or her debt. An alternative for some filers is Chapter 13,
which requires a debtor to work out a plan for repaying most of what is owed
over three to five years. Heavily indebted individuals trying to hold onto
their homes typically use a
Chapter 13 filing.

For years, credit card issuers, auto finance companies and other lenders
lobbied Congress to restrict consumers' use of Chapter 7. They argued that
many indebted individuals had the resources to repay at least part of what
they owed but avoided doing so by using a Chapter 7 filing. More of these
debtors should be required to devise a repayment plan under Chapter 13,
lenders contended.

Congress acted on their request with the 2005 legislation, which President
Bush signed into law in April. In addition to requiring credit counseling
for individuals who plan to file for bankruptcy, the law applies a means
test to filers whose income surpasses the median family income for their
state.

In Virginia, the median income is $56,455 for a family of two and $74,387
for a family of four - amounts influenced by incomes in Northern Virginia.
Both are higher than comparable figures for Hampton Roads. The median is the
point at which an equal number of incomes are higher and lower. The mean is
determined by adding the incomes and then dividing the total by the number
of incomes.

With the means test, debtors planning to use a Chapter 7 filing may have to
provide additional details about their living expenses and financial
resources to determine whether they have the income to repay part of what
they owe. If they do, they must use a Chapter 13 filing.

So far, the number of debtors affected by the means test has been slight
nationwide and locally, lawyers said. In a study released in February, the
National Association of Bankruptcy Attorneys said 97 percent of the debtors
who received pre-bankruptcy credit counseling in the wake of the new law
lacked the resources to repay any of what they owed. The attorneys' group
said it relied on responses from six credit-counseling firms for its
findings.
From November through January, fewer than 200 individuals filed for Chapter
7 bankruptcies in the U.S. Bankruptcy Court's Norfolk and Newport News
divisions.

That's because publicity about the tougher rules spurred many who were
thinking about filing for personal bankruptcy to act before the changes took
effect, bankruptcy lawyers said. More than 2,800 people in Hampton Roads
filed for Chapter 7 bankruptcy during the first two weeks of October - more
than double the unusually high total for September and five times the number
who filed in October 2004.

Lawyers and credit counselors predict that the level of Chapter 7 filings
won't remain depressed for long. That's partly because credit card issuers
have been raising the minimum monthly payments that cardholders must make,
pushing some households over the edge, they said.

The unsettled environment has prompted some attorneys to drop
personal-bankruptcy work. Others have had to revamp the way they handle
cases.

Harry W. Jernigan III, a Virginia Beach attorney who specializes in tax and
bankruptcy matters, said his firm installed $150,000 in office and computer
equipment to scan and store additional documents. Because of greater demands
on lawyers and their clients, "you had to gear up for the changes in
bankruptcy law or get out," Jernigan said. "We chose to gear up."

Also for the first time, bankruptcy lawyers face the prospect of routine
audits. The U.S. Trustee Program, an arm of the Justice Department that
administers bankruptcy matters, is now responsible for overseeing random
audits of Chapter 7 personal bankruptcy cases to assure compliance with the
new law.

That is one reason Jernigan's firm began preparing last summer to gather and
store more documents. If an attorney faces an audit and can't retrieve the
records that supported a client's bankruptcy filing, the client could lose
the court discharge of their debts, Jernigan said. That could be
catastrophic for many individuals, he said.
The additional work has already caused some firms to raise the fees they
charge for bankruptcy cases. Jernigan said his firm's fees for handling a
personal Chapter 7 - from $750 to $2,500 - are about twice what they were
before the law changed.

Reach Tom Shean at (757) 446-2379 or tom.shean@pilotonline.com.

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