Bankruptcy courts see more filings as law changes

Monday, June 20, 2005

More local people are beating a path to lawyers' offices to file for bankruptcy prior to the Oct. 17 enactment of a new law that will make it harder for some consumers to wipe the slate clean of credit card bills and other obligations.

Paul Berens, a Cape Girardeau attorney who was named Bankruptcy Lawyer of the Year two years ago by the Missouri Bar Association, said more people are filing before the deadline, and fewer lawyers will handle future bankruptcy cases because of a liability issue.

Berens, a fellow in the American College of Bankruptcy, said, "Calls are coming fast and furious. The inquiries have increased three- to four-fold than normal. People on the edge are now making that phone call. They're thinking they better find out about it before it's too late."

Berens said the new law appears to have been drafted by lobbyists' attorneys and not by bankruptcy experts. He said the bankruptcy code of 1978 was written by experts and has been fine-tuned over the years, and there was not much broken that needed to be fixed for people in Missouri.

"I understand there was a lot of creditor-funded lobbying that wanted these changes, and they finally got their way. There are so many areas that will require clarification," he said.

Berens said there will definitely be a decrease in lawyers wanting to handle bankruptcy cases after the law takes effect, because liabilities are placed on lawyers for information supplied by clients. He said lawyers would have to audit clients and that would cost clients more money.

"The intended thrust of the new law is to compel more people to live with the Chapter 13 format, a court-ordered method of making payments, and that is not necessarily a bad thing," he said.

The most sweeping rewrite of the bankruptcy code in a quarter-century has been sought by the financial services industry for nearly a decade, and President Bush this year made it part of his legal reform agenda. Bush signed the bill April 20, and it goes into effect six months from that date.

The law would set up a new test to measure a debtor's ability to repay. The test takes into account medical expenses, military status and elder-care expenses.

People who have an above-median income for their state and the ability to repay at least $100 a month for five years will be ordered into Chapter 13 bankruptcy, and a judge will order a repayment plan.

People with low incomes and few assets would continue to file under Chapter 7 of the bankruptcy code, which allows a judge to wipe out debts after some assets are forfeited.

The American Bankruptcy Institute estimates that 30,000 to 210,000 people would be affected by the new law, unless they file for bankruptcy before it takes effect.

Cape Girardeau attorney Gerald Johnson has seen an increase in bankruptcy filings since Congress passed the bill.

"I'm seeing several more clients a week than I previously did," Johnson said. "These are people who have read or heard about the changes, and they're anxious to get their filing done."

The increased interest tends to come from older people on fixed incomes who have high medical bills, high credit card bills or both. Johnson thinks the law will cost people more money to hire a lawyer, and fewer lawyers will handle bankruptcies.

"The big rumor among lawyers is that we would be held liable for incorrect information given to the court," said Johnson. "A lot of clients don't tell us everything they should. Some will forget things and a few will lie. So we would have to really verify and guarantee that what we're told is correct."

Sikeston attorney Rice P. Burns predicts an increase in bankruptcy filings and a decrease in lawyers handling such cases. He thinks the law has plenty of flaws, too.

Rice said the law will hurt banks that make car loans, because cars that normally would be paid off will now be returned. He said the law requires lawyers to advertise they are a debt-relief agency.

"There is also a requirement for debt counseling that will create a new bureaucracy and cottage industry," said Rice. "And there'll be some unscrupulous counselors out there."

Rice said the law requires debtors to provide copies of their tax returns to creditors that request them, which could become a privacy issue for debtors.

"It's a very complicated law for lawyers, and fewer lawyers will want to handle these cases," he said.

Last year, about 1.6 million people filed for bankruptcy, a slight decline after several years of steady increases.

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