Changes to the federal bankruptcy law taking effect later this month are causing a surge of new filings by debtors worried they won’t qualify for the Chapter 7 liquidation process and be forced into a more stringent Chapter 13 repayment process.
“I’ve talked to all my colleagues who do consumer bankruptcy cases and everybody is busy. Everybody is up to their eyeballs in business and it’s all because of the changes in the law,” said Tom Gorrill, a San Diego bankruptcy attorney who has been practicing for more than 20 years.
According to the clerk’s office of the U.S. Bankruptcy Court Southern District in San Diego, filings for the past two months are much higher than figures for most of this year and the comparative months in 2004.
For August, there were 1,179 new bankruptcy cases filed, up 59 percent from August 2004. Through Sept. 26, the number of new filings has exceeded 1,200, compared with fewer than 800 in September 2004.
The vast majority of the new filings were for Chapter 7 liquidation bankruptcy, the most common form of bankruptcy. Filings for two other types of bankruptcy, those dealing with corporate reorganizations , Chapter 11 , and those involving a multiyear repayment of debts , Chapter 13 , have remained about the same as last year, according to the clerk’s office.
Bankruptcy attorneys say the key change in the law that takes effect Oct. 17 involves “a means test,” based upon a person’s income, to determine whether a debtor can qualify for Chapter 7 bankruptcy. Those with incomes above the state’s median of $42,012 for a single person, or $68,310 for a family of four, would have to file under the Chapter 13 process.
Change In Filing
The problem with the revisions to the U.S. Bankruptcy Code is that some debtors who have income above the median may be forced into filing Chapter 13 and be in an even worse position should they fail to make their scheduled repayments, said Kay Catherwood, a partner with Duane Morris LLP in San Diego. Catherwood also is the president of the San Diego Bankruptcy Forum, an organization of bankruptcy attorneys and other professionals involved in debt reorganization.
“What happens if you’re someone who has a serious illness and you’re making money, but you have these high medical bills, and you miss a payment on your plan and get kicked out of Chapter 13? Then where do you go?” Catherwood said.
Because consumer debtors probably wouldn’t qualify for Chapter 11 corporate bankruptcy because of much higher debt thresholds, these debtors would have no judicial recourse and be saddled with an impossible debt obligation, she said.
The goal of the bankruptcy changes that were signed into law in April is to make those who have the ability to repay their debts to do so.
Some people who had sought bankruptcy protection in the past had sufficient income to repay some of their debt, but were using the liquidation process to discharge it, attorneys said.
“(Congress) wanted to make sure that if a debtor has the ability to repay the debt, they’ll be forced to do so,” Catherwood said.
While there were debtors who abused the bankruptcy process by filing multiple times and simply racked up excessive credit card bills they should have paid off, such cases are the minority, said attorneys.
The Bankruptcy Code changes are going to make it much tougher on everyone, Gorrill said.
“They took a meat ax to a problem where they could have used a filet knife,” he said.
Despite the means testing, the changes won’t affect the majority of consumer debtors because they won’t have incomes above the median, Gorrill predicted.
“I’ve seen one study that estimates it will impact only between 8 to 15 percent of the cases filed,” he said.
Another aspect of changing the Bankruptcy Code that troubles Gorrill and other bankruptcy attorneys is how the rules are more delineated and allow little room for interpretation by judges.
“A lot of judicial discretion has been removed under the new code,” he said.
Judge John Hargrove, chief justice for the U.S. Bankruptcy Court in San Diego, agreed that while the current system isn’t perfect, existing mechanisms were in place to address abuses and possible fraudulent filings.
“I haven’t seen much abuse, and the abuse that I have seen has been caught with the U.S. trustee’s office,” Hargrove said.
Legal Fees Rising
One clear consequence of the changes that will soon take effect is an increase in the legal fees debtors will pay.
“It’s going to make it more expensive for a debtor’s counsel,” Hargrove said.
For example, the new law requires attorneys to conduct a reasonable investigation into a debtor’s background. What is reasonable isn’t clearly defined, so nobody really knows what that means, Hargrove said.
“It’ll be more difficult to file. The new forms look like a tax return,” he said.
Another aspect of the new code requires anyone seeking bankruptcy to complete a certified credit-counseling program before filing their papers and a financial management course before the case is discharged.
“We expect to see more people coming through our doors for this service,” said Dianne Wilkman, the president of Springboard, a nonprofit credit counseling agency based in Riverside with five offices in San Diego.
The purpose of the pre-filing sessions and management courses, which would cost $30 to $50, is to get debtors to consider alternatives to bankruptcy, make sure that they understand how credit cards work, and realize the value of establishing a budget so they don’t find themselves overwhelmed by debt in the future.
The upcoming deadline on the new law changes has also caused an increase in law firms advertising to capture new business.
The Pacific Law Center, which is based in La Jolla, has been running ads in the local media stating that after the deadline for the bankruptcy law, it’s going to be more difficult and more expensive to file for bankruptcy.
Jeff Schreiber, a bankruptcy specialist with Pacific Law Center, estimates the code changes will result in increased fees from $500 to about $1,000, bringing the total cost for a typical personal bankruptcy to about $1,800 to $2,000.
Thanks to publicity about the upcoming Oct. 17 deadline, his firm has seen the number of new bankruptcy clients double compared with the number filing just three months ago, he said.