Attorneys: Bankruptcy law reform misses the mark

The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, which took effect Oct. 18, 2005, was intended to make sure that people who could repay their debts were required to do so by filing Chapter 13 repayment plans rather than filing for Chapter 7 bankruptcy and liquidating their assets.

The change was made to encourage personal responsibility for debts, and the thinking was that the change would result in fewer people filing for bankruptcy. So far, the law seems to be working in terms of the numbers: Springfield courts handled 1,018 cases from January through September, down nearly 70 percent from the same period in 2005.

Activity has picked up in recent months, according to Angela Acree, managing partner of The Bankruptcy Clinic LLC. She said that while her office handled “maybe two or three” cases after the new law took effect in 2005 – compared to 72 the week before the change – the company is now working at near pre-law-change levels.

John Cisternino, chief deputy clerk for the U.S. Bankruptcy Court’s Western District of Missouri, said he also has seen a steady increase in filings in recent months – 711 cases were filed in the district in September, compared to 170 in November 2005.

“It’s not what it was last year or in the preceding few years, but it’s coming back,” Cisternino said.

In fact, the Bankruptcy Law Anniversary Survey conducted earlier this month by the National Association of Consumer Bankruptcy Attorneys showed that 69 percent of attorneys think bankruptcy filings will return to pre-2005 law levels by the end of 2007.

Meanwhile, other results of the new law are drawing mixed reviews.

Acree said that while the regulations were intended to persuade people to be more responsible with their money, the law really tackles a nonexistent issue.

“A lot of people – creditors and credit card companies – said that people were abusing the system,” Acree said. “What we ended up with is this huge mess called the Bankruptcy Reform Act, which hasn’t addressed the (debt) issues at all.”

Another aspect of the law – the use of a “means test” to determine eligibility – could potentially curtail abuse, but it isn’t working as expected, according to Jon Gold, partner with Reynolds, Gold & Grosser PC.

With the means test, attorneys must collect six months of pay information for potential filers and plug it into a formula that determines eligibility for liquidation under Chapter 7 bankruptcy.

“I think Congress thought there were a lot more high-income people resorting to Chapter 7 before the change and they thought they would fix that problem,” Gold said.

According to the NACBA survey, however, there hasn’t been the expected increase in Chapter 13 filings. In the survey, 53 percent of respondents said there’s been no change in the number of people forced into filing Chapter 13 repayment plans.

Douglas Evans, a partner with Evans & Green LLP, works with creditors in bankruptcy cases. He said the new law doesn’t really do much to help creditors either.

“In my opinion, and in the opinion of most creditors’ rights attorneys that I’m familiar with, this bankruptcy act was pretty poorly thought out,” Evans said, pointing to the lack of input from debtors’ attorneys, creditors’ attorneys and bankruptcy law professors in writing the new regulations.

Credit counseling

The new law also requires credit-counseling classes for potential filers within 180 days of filing and again after filing is completed.

But Acree says the classes don’t help everyone – especially people who had little control of the cause of their bankruptcy.

Gold noted that credit counseling is always a good idea, but he agreed that it’s not going to solve problems that arise from situations that consumers can’t control.

“How do you prevent someone from losing a job? If we have debt and we can manage it based on our pay, what happens when you don’t have that same pay? What happens with major medical bills?” Gold said. “There are certain things that can happen that lead us to file bankruptcy that no legislation can hedge against.”

While 41 percent of respondents to the NACBA survey said increased credit card interest rates were one of the top two reasons for bankruptcy, 64 percent cited home-related debt, and 40 percent cited unemployment.

In the end, Acree said the law has only served to make it harder for people who legitimately need help.

“There’s a group of people out there that need help, and I don’t know what’s going to happen to them,” she said.

While creditors’ attorney Evans said the new law has probably reduced the number of bankruptcies among those who were marginal about whether to file or just repay their debts – which is helpful for creditors – the law is a large-scale approach to a small problem.

“There wasn’t anything major that was wrong with the code before they amended it,” Evans said. “A few little tweaks would have been fine.”

On the Rebound

Are you seeing an increase in bankruptcy filings (third quarter 2006 compared to first and second quarters)?

Increase – 68.5 percent

About the same – 13.7 percent

Decrease – 16.9 percent

How long will it take for bankruptcy filings to return to pre-2005 law levels?

By end of 2007 – 69.0 percent

Some time in 2008 – 9.3 percent

Never – 9 percent

Don’t know/not sure – 12.8 percent

Source: National Association of Consumer Bankruptcy Attorneys Bankruptcy Law Anniversary Survey