New bankruptcy laws go into effect soon

Come Oct. 17, taking the desperate financial plunge into bankruptcy will become even more frightening.

That's when new rules take effect that are being called the biggest change in U.S. bankruptcy laws in nearly three decades. And the new laws, called the Bankruptcy Abuse Prevention & Consumer Protection Act of 2005, are intended to make it more difficult for maxed-out borrowers to wipe away debt or even get debt relief.

"They amended 200 sections of the code," said Paul Berens, a Cape Girardeau bankruptcy lawyer. "This is not a cosmetic thing. This is a major overhaul."

The new law is generally viewed as making it tougher on consumers who can afford to pay off some of their debts. The new codes steer debtors away from Chapter 7 liquidation, which largely enables debtors to wipe clean their debts and start over, and toward Chapter 13, which requires partial repayment.

That is expected to translate into fewer people filing Chapter 7, specifically if their incomes are above the state median of $60,528 in Missouri for a family of four. According to Berens, and other local bankruptcy lawyers, about 70 percent of people filing for personal bankruptcy use Chapter 7. About 1.6 million Americans filed for bankruptcy in 2004.

The fast-approaching date on which the new laws take effect -- just 41 days from today -- is causing a rush of bankruptcy filings by those wanting to beat the deadline.

Several local lawyers said they've been extra busy this summer with people trying to file before Oct. 17. According Dana McWay, court clerk for the U.S. Bankruptcy Court for Eastern Missouri, there has been a 10 percent increase in filings since April. The Eastern District includes all of Southeast Missouri.

"I've been told that there's been television commercials that run late at night by some lawyers urging people to beat the deadline, so I'm not surprised," she said. "So we are much, much busier because of that."

While no one denies that the new laws will have sweeping effects on how bankruptcies are handled, local lawyers had different opinions about how successful the overhaul will be.

Berens, for example, is a bankruptcy lawyer who primarily represents creditors. He said the last time the bankruptcy laws were changed in 1978, the laws were well done and well balanced.

The new bankruptcy laws aren't, he said.

"Not even close," he said. "A lot of it is somewhat mean-spirited. It was all drafted by lobbyist lawyers. A lot of things in these laws are ambiguous and hard to understand. There will be a lot of confusion."

For example, the new law establishes a means test for Chapter 7. The means test is a new addition to bankruptcy law that uses household income and family size to determine the level of protection and debt relief an applicant qualifies for.

The existing law gives borrowers a lot of leeway to file for either Chapter 7 or Chapter 13. Chapter 7 filings may require the sale of all but the most basic assets protected by law but wipes out more debts entirely when the process is complete. Chapter 13, however, allows filers to keep more of their assets but the court orders them to make payments on at least part of their debt for up to three years.

But the means-test portion of the new laws changes all that. Under the means test, borrowers can choose Chapter 7 debt liquidation only if their incomes are below the state median or they have too little money left after the calculation to pay $100 a month to creditors. Borrowers with higher earnings or more disposable cash must choose Chapter 13, which will now require five years of repayment rather than three.

"It puts too much of the burden on the debtor," Berens said. "I don't think that's what the founding fathers meant when they put that in the Constitution. Of course, they'd never heard of Chapter 13."

Berens said that some routine expenses of the household, such as trash pick-up and postage stamps, aren't covered in determining whether you can file for Chapter 7.

"But let's get back to reality: They do owe the debt," Berens said. "It just sort of ties our hands."

The new bankruptcy law will also require people to undergo bankruptcy counseling before being able to file. But Berens cites a Harvard study that shows 65 percent of debtors are filing for bankruptcy -- not because they're "deadbeats" -- but because of medical bills.

"What are counselors supposed to tell these folks -- you shouldn't have paid your medical bills?" Berens said. "I think we're going to see a lot of frustrated people here."

Elizabeth Chastain, another Cape Girardeau bankruptcy lawyer, doesn't agree entirely with everything Berens said.

"I do agree that there are a lot of question marks," she said. "But I think it is going to snare a lot of high-income debtors. It's going to catch a certain number of people who have the income and don't deserve debt relief. I think the impact of these laws has been a bit exaggerated."

She said that those people who have a lot of medical bills won't be impacted at all by the new law changes.

"These people aren't going to be above the state's median income," she said.

Chastain also pointed out a change to the way bankruptcy laws deal with family homes. Missouri currently protects up to $8,000 of a homeowners equity from creditors. Other states, like Florida and Kansas, shields the entire amount. Under the new rules, no more than $125,000 can be exempted anywhere in the nation.

"It's all pretty complex," she said.

The biggest changes will be to lawyers, she said, who now have to basically relearn their trade. There are many more legal hoops for lawyers to jump through. Some have suggested it will mean higher fees for bankruptcy lawyers.

Bankruptcy lawyer Daniel Statler doesn't see the new laws as an improvement over the old laws.

"I think it's making poor people pay more, to jump through more hoops and to make it more difficult for them to file," he said. "Business interests and banks have been lobbying for this for years and years and they're finally getting their way."

smoyers@semissourian.com

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