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New Bankruptcy Law, One Year Later

By Martin H. Bosworth
ConsumerAffairs.com

October 17, 2006

• Bankruptcy "Reform" Fails to Deliver • Bankruptcy Filings Top 100,000 in October • Personal Bankruptcies On the Rise • New Bankruptcy Law Hurts Consumers and Lenders, Report Finds • Obama Calls for Bankruptcy Law Reform • Bankruptcy Recovery Time Longer than Many Expect • Bankruptcy Rates Rise Among Older Americans • Consumer Bankruptcies Up 47% from Last Year • Bankruptcy Filings Soared in February • Senate To Debate Bankruptcy Law Changes • Dodd Announces Bankruptcy Reform Legislation • Bankruptcy's Early Warning Signs • Credit Counseling Not Helpful in Bankruptcy Cases, Study Finds • New Bankruptcy Law, One Year Later • Bankruptcy Filings Set Record in 2005 • Consumer Borrowing Plunges In October • Lawsuit Challenges New Bankruptcy Law • New Bankruptcy Law Tightens Rules, Adds Paperwork • Bankruptcy Filings Surge Ahead Of New Law • IRS Plans to Yank Tax-Exempt Status of 20 Credit Counselors • Credit Cards Ensnare, Victimize Working Families, Report Finds • Congress May Modify Bankruptcy "Reform" that Penalizes Katrina Victims --- Related Stories • Red & Blue United • A Test of Means or A Mean Test? • Cui Bono? (Who Profits?) • Long View, Long Road • "Laws Can Be Written Again" • What You Can Do • Senate Passes MBNA's Bankruptcy Bill • Congress Ready to Tighten Bankruptcy Law • Medical Bills Leading Cause of Bankruptcy, Harvard Study Finds

It was a year ago today that the most sweeping changes to bankruptcy law in American history took effect.

Though the financial industry and their friends in Congress applauded the new law as cracking down on deadbeats, the strict new rules and expensive requirements have caused frustration for debtors, lawyers, and judges alike.

Not only that, the law is failing at its stated purpose of reducing bankruptcy filings. Reports from around the country indicate that filings for bankruptcy are starting to approach levels consistent with petitions under the old law, and the lack of available studies is preventing a comprehensive answer as to whether or not the trend will continue.

Under the new law, individual petitioners have to jump through many more hoops to file for Chapter 7.

Petitioners have to pass a "means test" to determine if they are so destitute that they cannot pay any of their bills. The test has been criticized as inflexible, as it paints people suffering from medical debt or job loss in the same corner as someone who's maxed out their credit cards or stolen money.

If a petitioner can't pass the means test, they are shunted to Chapter 13 bankruptcy, which requires them to pay off at least some of their debts in a reorganization plan.

The petitioner must also take mandatory credit counseling offered by a government-sanctioned nonprofit agency, a move many deride as wasteful and unnecessary.

The new law also requires more work on the part of bankruptcy lawyers, with more forms to fill out and interviews to conduct. This has led many lawyers to stop doing bankruptcies and others to charge higher fees, leading to fears that which has led some to fear consumers will be driven away from filing for bankruptcy due to the sheer cost involved.

Return Of The Bad Times

Supporters of the new bankruptcy law claimed that there would be a precipitous drop in filings after the law was enacted, as those trying to evade their debts through liquidation would find the process too difficult to pursue.

Initially, that seemed to be the case, as filings dropped to slightly over 100,000 in the first quarter of 2006, as opposed to over 600,000 in the last quarter of 2005 and a year-round total of over 1.6 million.

But the statistics were measured against an abnormal spike in bankruptcies, as debtors rushed to get their petitions in before the new law took effect. Now bankruptcy lawyers and courts are noticing a slow rise in filings around the country.

The Gulf Coast is showing a steady climb in bankruptcy filings, particularly in states hardest hit by Hurricanes Katrina and Rita, such as Louisiana, Mississippi, and Alabama.

Homeowners struck by the storms and receiving no assistance from their insurance companies are looking to file Chapter 13 in order to prevent foreclosure on their properties and get some financial relief.

House Judiciary Committee chairman F. James Sensenbrenner (R-WI), a staunch supporter of the new laws, infamously refused to hold hearings in order to waive portions of the new bankruptcy laws to provide relief for Katrina victims.

The Justice Department's Trustee division, which oversees national bankruptcy laws, agreed to temporarily waive some of the toughest provisions of the law for victims of the hurricane, but creditors have since resumed demanding payment for damaged or destroyed properties in the Gulf.

Debtors' Prison

Even without the hurricane damage compounding matters, Alabama bankruptcy lawyer Brad Botes said that consumers are still drowning in high credit card debt, spiking home interest rates, and out-of-control home equity loans.

Although supporters of the law claimed that it was designed to weed out "frivolous" petitions, numerous analyses have been published that indicate the leading causes of bankruptcy are heavy medical debt, loss of a job, or the credit card crunch, or -- often -- all three.

A February 2005 study by the Health Affairs medical journal found that the costs of illness and medical expenses accounted for half of the 1,458,000 personal bankruptcies in 2001.

A February 2006 study by the National Association of Consumer Bankruptcy Attorneys (NACBA) challenged the assertion that the majority of filers for bankruptcy were "deadbeats."

In surveying credit counseling agencies for information on why petitioners were filing after the law, NACBA found 79 percent of those seeking credit counseling prior to filing bankruptcy were doing so due to circumstances beyond their control, such as job loss, home loss, serious medical illness, and so on.

"[T]he sweeping federal bankruptcy law changes...are doing little more than imposing new costs and paperwork burdens on tens of thousands of already distressed Americans, the vast majority of whom are being forced into bankruptcy due to financial circumstances beyond their control," the report said.

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