Starting over is about to get tougher
By FRANK NORTON
Bankruptcy professionals predict a busy summer as filers scramble in anticipation of new federal rules that will make it harder and more expensive to erase debt and start anew.
“We’re already seeing an uptick in the number of filings,” said Sam Gerdano of the American Bankruptcy Institute, an Alexandria, Va.-based group that includes lawyers, bankers, judges and other bankruptcy professionals.
Nationally, the number of bankruptcy petitions filed in the first three months of the year rose about 8 percent from the previous quarter to 401,149, according to the U.S. Bankruptcy Court. The national total is expected to rise further as the law change draws nearer.
Experts believe filings will jump more in the second and third quarters amid concerns over the new bankruptcy law slated to take effect Oct. 17.
At that time, millions of Americans will be barred from protections provided under Chapter 7 of the U.S. Bankruptcy Code, which wipes out credit card and other debt that is not secured by a house or other assets. More than two-thirds of bankruptcy filers use Chapter 7.
Stephen Gager, 36, a computer technician who was left with more than $30,000 of debt after a divorce, said he is relieved to be among those who recently sought a fresh start under Chapter 7.
“I would feel better if I were able to pay it all off, but in the end it’s nice to be able to at least set a new starting point,” said Gager, who would become ineligible for Chapter 7 protection after October.
After paying down the bulk of his debt, Gager decided to extinguish the last $6,000 under Chapter 7 so that he could focus on studying full time.
Some bankruptcy lawyers said they are seeing about 25 percent more cases than a year ago.
“The change in the law is making people examine whether they to ought to file now or risk doing it Chapter 7 so that he could focus on studying full time.
Some bankruptcy lawyers said they are seeing about 25 percent more cases than a year ago.
“The change in the law is making people examine whether they to ought to file now or risk doing it later,” Raleigh, N.C., attorney Billy Brewer said.
The Bankruptcy Abuse Prevention and Consumer Protection Act, passed in April, is the largest overhaul of the bankruptcy system in nearly three decades.
The law will significantly narrow benefits by requiring filers who earn above the median income for a family of the same size in the same state to enter a five-year repayment plan under Chapter 13. That’s instead of being able to wipe out their debt under Chapter 7, as is now permitted.
The law will also require filers to complete credit counseling courses and additional paperwork.
Critics say the law unfairly targets those who run up debts through no fault of their own, such as through job loss, medical bills, divorce and caring for aging parents. They also say it will increase the cost of bankruptcy for all debtors.
The new law will require lawyers to investigate the financial affairs of clients and the accuracy of their statements, including their tax returns.
“Even the simplest cases will require more preparation, and I’d say that means an extra 20 percent in fees,” said bankruptcy lawyer Brewer.
A typical bankruptcy costs from $800 to $1,200, according to lawyers in the Triangle.
The new law’s supporters, including a coalition of banks and credit card companies that successfully lobbied for the legislation, say it will cut down on abuse of the bankruptcy system by people shirking debt they are able to repay. They say the steep increase in filings, which reached a record 1.66 million in 2003, is evidence of abuse.
Some experts say the recent resurgence in bankruptcy petitions has as much to do with rising interest rates and higher required minimum monthly payments for credit cards as the new legislation.
Several major credit card issuers, including Citibank and MBNA, are raising minimum monthly payments this year, in some case doubling them to as much as 4 percent of debt balances, experts said. For someone with $10,000 of debt, the minimum payment would increase to $400 from $200.
“The impact of higher minimum payments will phase in further over the next couple of months and really start to take effect towards the fall,” said Robert McKinley of CardWeb.com.
The numbers already show a sharp rise. In April, Americans filed a record of more than 170,000 bankruptcy petitions, the second month in a row filings rose sharply after a steady two-year decline, according to Maryland-based CardWeb.com.
Concern over the new bankruptcy law is spilling into other legal proceedings such divorce, which often goes hand in hand with bankruptcy. Narrowing the opportunity for a fresh start will exacerbate the financial stress of divorce as well as bankruptcy, divorce attorneys said.