Flurry of activity precedes changes in personal bankruptcy law
By George Chamberlin , Daily Transcript Financial Correspondent
Monday, August 29, 2005

It's officially known as the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005. But, more realistically, it might appropriately be called the Full Employment for Bankruptcy Attorneys Act.

According to the Administrative Office of the U.S. Courts, there were a record 467,333 bankruptcy filings in the second quarter of 2005. The vast majority of the filings were for personal bankruptcies. The rush to court to deal with debt was prompted by sweeping changes in the law that go into effect in mid-October.

"Bankruptcy has gone from a stigma to a financial planning tool for many," said Mallory Duncan, general counsel for the National Retail Federation. "Every one of those filings means more bad debt getting passed on to consumers, and consumers are tired of picking up the tab."

The federation -- which aggressively supported the legislation -- points out that in 1978, less than one person in a thousand filed for bankruptcy. In 2004, the number of filings had increased six fold.

"Many bankruptcies are legitimate, but too many are being filed by people who could afford to pay but choose not to. This bill will return bankruptcy to being the safety net it was meant to be," said Duncan.

The changes in the bankruptcy law that was approved by Congress and signed by President George W. Bush in April does not eliminate the two basic types of filing: Chapter 7, which discharges most unsecured, nonpriority debt, and Chapter 13, which establishes a repayment plan.

Many opponents to the changes say that the safety net provided by bankruptcy will be eliminated under the new law. But, new evidence suggests that is not the case.
A study by Best Case Solutions, a company that provides software for attorneys, found that 85 percent of debtors who file for bankruptcy under Chapter 7 would still be eligible with the new law.

"The data backs up what bankruptcy attorneys tell us about their clients: These are not wealthy people trying to scam the system," said Lucinda Fox of Best Case Solutions. "They're people who are overextended, sometimes due to job loss, car accidents, divorce, or medical problems, and they often have high interest rates on car loans and credit cards that make it hard for them to ever get back in the black."
One of the provisions of the new law is that people filing a bankruptcy application must submit to a means test to determine whether they are able to repay some debt after certain allowable living expenses are deducted from their income.
Those who fail to qualify for Chapter 7 -- discharge of debt -- will be able to file for Chapter 13 and reorganize their obligations.

Another provision of the new law requires anyone filing for personal bankruptcy protection to first be required to meet with a representative of an approved credit counseling agency.

"We want to assure all those that will seek personal bankruptcy protection, that member agencies are well-qualified to help them fulfill the counseling requirement and gain the necessary knowledge about their financial situations to make informed decisions," said Dave Jones, president of the Association of Independent Consumer Credit Counseling Agencies.

One qualified agency -- Cambridge Credit Counseling -- says that despite low unemployment and a growing economy, mountains of debt and a sense of helplessness stress many people.

"We encourage consumers to consider financial education and credit counseling as the step before considering bankruptcy," said Cambridge's Chris Viale.
The need for financial services companies to educate consumers may become an unexpected consequence of the new law.

"Educating consumers about credit management, starting with those under the age of 30 where the majority of bankruptcy filings originate, can enable banks to build a strong and healthy relationship early in a consumer's financial career," said Sandra Kraft, vice president of marketing for InsightExpress, a financial marketing company.