New bankruptcy law will
make filing tougher
By SHANE EPPING
Money, money, money. The number of people filing
for bankruptcy in Missouri’s central division, including
Boone and 12 other surrounding counties, is on the rise, increasing
115 percent in the past five years. But, a new law will soon
make it tougher to file.
On Oct. 17, the Bankruptcy Abuse Prevention
and Consumer Protection Act of 2005, signed by President Bush
in April, will increase bankruptcy fees and tighten qualifications
for those seeking financial relief.
Several types of bankruptcy options exist: Chapter
7, 9, 11, 12 and 13. Chapter 7 offers consumers a clean slate,
Chapter 9 addresses municipalities, Chapter 11 deals primarily
with commercial clients , Chapter 12 targets family farmers
and Chapter 13 includes a repayment plan. Individual or business
status, amount of debt, length of repayments and consequences
to one’s credit history influence how people choose
a bankruptcy plan.
According to United States Bankruptcy Court
records, in 2004, 74.7 percent of the more than 37,000 bankruptcies
in Missouri were Chapter 7 cases, 25 percent were Chapter
13 and less than 0.5 percent were Chapter 9, 11 or 12.
“In the past, a bankruptcy offered a fresh
start for the filer,” said Columbia attorney Gwen Froeschner
Hart. “The new federal legislation offers language directed
at helping creditors.”
Under the new bankruptcy act, state-by-state
median incomes for families will determine who is eligible
for complete relief versus partial relief. This process is
known as the means test. According to bankruptcy judge Jerry
Venters, who works in Kansas City, this number will be $60,528
for families filing Chapter 7 cases in Missouri. However,
this figure is not set in stone. According to Internal Revenue
Service guidelines, there are both state and national deductions
allowable for subtraction from the income figure.
“There will be a reversal from present
practice in the bankruptcy trend,” said Venters. “People
will be forced into Chapter 13 while Chapter 7 becomes the
default.”
A consequence of the new trend will be that
filers will have to pay back some of what they owe as guidelines
outline. Yet, perceived inconsistencies remain.
“Someone earning say $80,000 can still
qualify for Chapter 7 if he can subtract a car, boat or other
secured debts from his income,” said Venters. “The
American adage of buying more ironically allows consumers
to still qualify for bankruptcy.” According to Froeschner
Hart, meeting complete relief eligibility will be difficult.
Those netting $166.67 or more after allowable deductions will
be presumed to be abusing the system, those between $100 and
$166.66 could be abusive and those less than $100 are eligible
for complete relief. At the same time, bankruptcy fees are
expected to increase.
Beginning on Oct. 17, lawyers will be expected
to verify income and debt by examining proof of expenses,
tax returns, bank statements, asset appraisals and a detailed
list of personal property. As a result, Froeschner Hart expects
lawyer fees and malpractice insurance will increase.
“Combining lawyer fees ranging up to $2,000
with court costs of $274, mandatory counseling fees of approximately
$60 and instructional programs potentially charging $100,
people can expect to pay $2,400 or more to file,” said
Froeschner Hart.
According to Cathie Middleton, a financial specialist
at Clearpoint Financial Solutions in Columbia, formally Consumer
Credit Counseling, much of the debt people accumulate is a
result of keeping up with the Joneses and not thinking ahead.
Out of the 40 to 50 clients she counsels each month, Middleton
sees an average of three bankruptcies. Most of the debt is
credit card related and averages $32,000 — a result
of six to eight cards.
“I have seen members of all social classes
file for bankruptcy,” said Middleton. “The one
thing they have in common is a struggle to live within their
means.”
Considering that credit card expenses often
include medical bills and day-to-day expenses for the elderly
or those earning low or fixed incomes, legal professionals
worry about those on the low end of the economic pay scale.
“A lot of people don’t have medical
insurance and charge their prescription drugs,” said
Froeschner Hart. “With the recent Medicaid cuts
and rigid bankruptcy legislation, I don’t know what’s
going to happen to these people,” Froeschner Hart said.
She disagrees with the insinuation that consumers
are abusing creditors.
“Credit card companies are begging for
customers and offering large amounts of unsecured credit,
yet at the same time, lobbying for stricter debt controls,”
said Froeschner Hart.
Judge Venters and Froeschner Hart agree that
the new legislation is confusing. There are more forms to
fill out and the consequences include higher fees.
Although the number of bankruptcies filed in
Missouri is increasing as Oct. 17 approaches, there is no
definitive evidence suggesting that people are attempting
to beat the new guidelines.
“Bankruptcy numbers are up, but I can’t
say the upcoming changes in October are prompting them,”
said Venters.
Nonetheless, a recent press release from the
American Bankruptcy Institute reported that second quarter
filings, April 1, 2005 to June 30, 2005, are the highest in
history. The report states that the numbers will most likely
continue to rise into the third quarter. A rise by 17.7 percent
in consumer Chapter 7 filings pushed the jump.
“I think it’ll continue to get worse,”
said Froeschner Hart. “Most people are embarrassed and
cry their eyes out when they’re in my office.
Froeschner Hart said: “At this point,
the costs and benefits of the new bankruptcy act remain to
be seen.”
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