- The Washington Times - Tuesday, October 17, 2006

The number of people filing for bankruptcy plummeted by about 83 percent immediately after a tough federal bankruptcy reform law took effect one year ago, but filings are beginning to creep upward.

The law made it more difficult for people to get protection from their creditors, forcing many to repay part of their debts, fill out more forms and endure more procedures before the bankruptcy courts finish with them.

“It’s a whole different game now,” said Gordon Peyton, a bankruptcy trustee in Alexandria.

Mr. Peyton said he used to preside over three or four interviews of bankruptcy filers in a day, but now does only about two. His one-on-one interviews can take 12 minutes or more — compared with an average of 35 seconds or so before the law took effect, he said.

“It’s gotten so tricky. There are a lot of pitfalls,” said Mr. Peyton, a private lawyer appointed as a bankruptcy trustee.

Since the initial sharp drop in bankruptcy cases after the new law took effect Oct. 17, 2005, the number of filings has started to increase, according to the Administrative Office of U.S. Courts.

When the number of bankruptcy filings is spread over one year before and after the law took effect — including the initial drop and the filing resurgence — it averages out, and the change in the number of filings does not seem so drastic.

Nationally, bankruptcy filings fell 9.3 percent between June 2005 and June 2006, an Administrative Office of U.S. Courts report says.

In the Washington area, the drop was greater.

Bankruptcy filings were down 11.7 percent in the District, 13.5 percent in Maryland and about 20 percent in Virginia.

The higher-than-average drop in bankruptcies reflects the region’s economy as much as it does the new law, said James M. Lewis, a Washington bankruptcy lawyer.

“When the economy is good, more people are employed, and therefore there are less people in financial straits,” Mr. Lewis said.

Virginia’s sharp drop in bankruptcy filings shows “the economy has been strong largely on the rebound of tech businesses and the heavy emphasis on government contracts involving homeland security,” he said.

The biggest change for consumers in the last year has been filing under Chapter 7 of the U.S. Bankruptcy Code, which wipes out the debt after certain assets are forfeited.

After an eight-year campaign by banks, retailers and credit-card companies, Congress changed the law to require for the first time an income-based test for measuring a debtor’s ability to repay obligations.

Anyone who meets the legal standard for insufficient assets or income can file for Chapter 7 bankruptcy. But those with income above their state’s median who can pay at least $6,000 over five years is forced into Chapter 13, in which a debt-repayment plan is ordered.

“It’s definitely been more paperwork,” Mr. Lewis said.

Chapter 7 filings accounted for 58.8 percent of this year’s first-half total, down from 75.8 percent in the first half of 2005, according to the American Bankruptcy Institute, an organization of bankruptcy judges and lawyers. Filings under Chapter 13 debt reorganization jumped to 41.1 percent from 24.1 percent a year earlier.

Supporters of the law, such as the American Bankers Association, say it has created a more balanced system that eliminates abuse and provides debt relief at the level at which people truly need it. They argue that bankruptcy frequently has been the last refuge of gamblers, impulsive shoppers, divorced or separated fathers avoiding child support and even multimillionaires.

While the law has been great for credit-card companies that want to collect their debts, it continues to raise complaints from advocacy groups.

“The law assumes that everybody who got into bankruptcy is there for the same reason: because they were reckless in their spending,” said Maureen Thompson, legislative adviser for the National Association of Consumer Bankruptcy Attorneys. “You might have somebody who paid their bills responsibly all their lives only to find out that their medical insurance, well, isn’t so good after all.”

The income test for Chapter 7 means more questions from a bankruptcy trustee to probe details of a person’s mortgage, bills, life insurance, child-support obligations and car payments.

This article is based in part on wire service reports.


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