- The Washington Times - Friday, October 14, 2005

The new bankruptcy law that takes effect Monday will make it more difficult for debtors to escape paying their bills.

The law is supposed to clamp down on debtors who use bankruptcy to eliminate a nationwide total of at least $40 billion in debt each year.

“It’s going to make it more complicated and expensive for individuals and companies to file for bankruptcy,” said John Penn, president of the American Bankruptcy Institute, a nonprofit bankruptcy research and education group.

Concerns about the law were evident among bankruptcy filers at federal courthouses in the Washington area this week.

“Really, no one’s sure about the new laws,” said a 35-year-old former executive assistant from Fort Washington as she left the bankruptcy clerk’s office at the federal courthouse in Greenbelt Thursday. “That was my whole reason for filing.”

She carried copies of her financial records as her 3-year-old son stood at her side. About a half-dozen other filers stood in line minutes before the clerk’s office closed.

“I had a repossession and a bunch of bills,” she said. “I’m a single parent, and I knew I couldn’t pay it off.”

Instead of discharging their debts completely, the new law will allow bankruptcy courts to examine the finances of debtors to determine whether they should be compelled to make at least small regular payments.

“The paperwork burden is greatly increased on debtors in terms of the disclosure they’ll have to make,” said Ira Herman, a bankruptcy lawyer for firm Bryan Cave LLP.

The cost of filing also is increasing.

Lawyers will face disciplinary procedures if they cannot certify that the information from their clients is correct. In addition, debtors will be required to pay for and attend credit-counseling courses.

“I’ve had conversations with attorneys who are talking about doubling or tripling the fees in consumer cases,” Mr. Herman said.

Personal bankruptcies typically cost $1,500 to $3,000 under the expiring law, according to the American Bankruptcy Institute. Divorce, death in the family, health problems and unemployment are the most common reasons for bankruptcy.

Congress designed the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 to reduce abuses by people who spend irresponsibly, then try to escape their debts by declaring bankruptcy.

After years of disagreement, Congress passed the bill and President Bush signed it this year.

Personal bankruptcy filings rose from 1.2 per 1,000 people in 1980 to more than 5.4 per 1,000 people last year, a nearly 350 percent increase, according to the Administrative Office of the U.S. Courts.

The new law allows consumers to file for protection from creditors under either Chapter 7 or Chapter 13 of the bankruptcy code.

Chapter 7 allows a complete liquidation of a debtor’s assets to pay creditors. Chapter 13 requires repayment of secured debts, such as auto loans and financed home appliances, and much of a consumer’s unsecured debts, such as remaining credit-card balances.

The new law establishes a “means test,” which will allow courts to examine the finances of debtors to determine the most appropriate chapter of the bankruptcy code for their filing.

Only if their income for the previous six months falls under the state median would they be eligible to liquidate all their debts under Chapter 7.

In addition, if a judge determines that debtors can repay $100 per month for the next five years, after monthly expenses, they are not allowed to liquidate debts under Chapter 7.

A 40-year-old police dispatcher from Indian Head, Md., said it was “a very good thing” she was filing her bankruptcy claim yesterday instead of after the new law takes effect.

She faces a foreclosure on her house and asked that her name not be used.

“I don’t want to lose my house,” she said as she headed into the federal courthouse carrying a file folder of papers.

The new law sets equally tough guidelines for businesses declaring bankruptcy.

Beginning Monday, companies can file reorganization plans up to a maximum of 18 months. After 18 months, creditors can file plans proposing to reorganize the companies. Currently, there is no limit on how long judges can extend the exclusive right for debtors to file their reorganization plans.

“In cases like Enron, which is so large, that’s a significant change in the law,” Mr. Herman said.

Retention bonuses for executives will be capped so they cannot reap windfalls while their companies are in bankruptcy.

Under one of the formulas, executive bonuses can be no more than 10 times the average retention bonus paid to nonmanagement employees during the current year.

Hurricane Katrina victims will receive an indefinite postponement in credit-counseling courses if they declare bankruptcy.



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