Bankruptcy reform bill would tighten Chapter 7 standards

Personal bankruptcies could rise dramatically this fall if Congress passes the Bankruptcy Abuse Prevention and Consumer Protection Act of 2002.

"If that happens, I would suspect that we'll have an even greater increase in filings for folks that want to get in under the wire and not be subject to the new law," said U.S. Bankruptcy Judge Arthur Federman. Federman handles the Springfield docket, which is in the Western District of Missouri, Southern Division.

The bankruptcy act would funnel debtors to protection under Chapter 13 bankruptcy, which requires repayment of most or all debts, rather than the more forgiving and popular Chapter 7 bankruptcy.

Chapter 7 allows debtors to cancel debts after liquidating their assets. Under the proposed law, a complicated formula based on income would be used to determine if a debtor could file Chapter 7.

If passed by Congress, the act would need to be signed into action by President Bush before going into effect 180 days later. With a six-month warning period, bankruptcy clerks, judges and attorneys around the nation are gearing up for a bull rush of filings by those wanting to avoid the new law.

The bill is before the House of Representatives, and would also need to be approved by the Senate after it reconvenes in September. If it is approved, the bill would then go to President Bush's desk.

Record filings

To aggravate the issue, bankruptcies have already been on the rise.

The proposed legislation comes on the heels of a record year for filings nationwide. The year 2001 saw 1,492,129 filings, a 19 percent increase from 2000.

The trend is continuing this year.

In the 12 months ending June 30, more than 1.5 million bankruptcies were filed. This year's second-quarter filings of 400,686 represent the largest number of filings in a single quarter in history, according to the American Bankruptcy Institute, a nonpartisan organization that researches bankruptcy issues.

"I don't have any reason to believe that the filings are going to go down anytime soon," Federman said.

Locally, bankruptcy filings are up 12 percent from this time last year in the Western District, according to John Cisternino, chief deputy bankruptcy clerk in Kansas City where Western District bankruptcy cases are filed.

Who's to blame?

Bankruptcy attorney Lee Viorel, with Husch & Eppenberger, places some blame on the nation's credit card companies. Viorel mostly represents creditors.

"They offer credit, and I don't think people realize until after the credit starts mounting what they've gotten themselves into," Viorel said.

Those creditors are lobbying for the legislation, according to Shari DeArmon of Groce, Groce & DeArmon, who represents debtors. She opposes the bill because it could hobble many of her clients.

Tom Kelly, spokesman for First USA/Bank One in Chicago, said creditors favor the reform bill because they take a loss when consumers file Chapter 7.

"We try to make credit available to people who we think have the ability to repay it," he said. "We lose when people declare bankruptcy."

Viorel recognizes that bankruptcies are necessary in extreme situations, but thinks consumers also should be held more responsible. He favors the legislation.

"I think bankruptcy fulfills an honest, legitimate purpose in our nation," he said. "I'm all for the fresh start idea, but I believe that if (consumers) are going to go into bankruptcy, they have got to be realistic about actually giving everything up."

Because Chapter 7 is more forgiving, it has been more popular than Chapter 13 filings, Viorel said.

Chapter 7 also has been the favored approach for debtors because it is cheaper to file, DeArmon said. She said it costs approximately $900 to file Chapter 7, while Chapter 13 fees are double that.

The art of credit counseling

Although the number of filings is up, those seeking help at Consumer Credit Counseling have stayed steady, according to Mike Cherry, president and chief executive officer of the private, not-for-profit organization that educates the public on debt management.

Cherry said the organization helps 4,300 clients pay their bills each month, and half of those people are in Springfield. That's a typical number, he said.

He does not expect that to last, though.

"I think you're going to see a surge of bankruptcies over the next 90 to 120 days, just with the anticipation that it will become law," Cherry said.

That will mean a larger workload in his office, which concerns him. Under the proposed law, filers must complete a credit education course before being discharged of the bankruptcy.

"However, there are no specifications in the bill with any kind of funding to support these required steps," Cherry said. "Yes, it may send people in our doors, but on the other hand, being a not-for-profit corporation, we will have to offer this service to people whether they can afford it or not. Where is the funding going to come from to support us doing this?"

Cherry said that in the first six months of this year, his office has conducted 123 budgeting and credit education programs with more than 2,800 people attending.

"We certainly favor the counseling session prior to filing bankruptcy, where there hopefully could be some alternative to repay the debt through a credit counseling agency," Cherry said.