Friday, March 11, 2005

The Human Face of Bankruptcy: The Rush to Court

From the New York Times

Bracing for a Bankruptcy Rush
By RIVA D. ATLAS and ERIC DASH

Published: March 11, 2005

Milton Haynes has been struggling for more than a decade. In recent months, Mr. Haynes, 72, a widower and a retired machinist from Chatham, Ill., had started to make a small dent in repaying tens of thousands of dollars in debts.

But faced with the prospect of new bankruptcy rules - approved by the Senate late yesterday in a 74-to-25 vote - that would make it harder for someone in his situation to erase debts, Mr. Haynes met with a lawyer last night to consider a bankruptcy filing. "The news panicked me," he said. "I keep trying to pay my bills, but I keep getting deeper into debt."

After meeting with his lawyer, Mr. Haynes decided to hold off. But bankruptcy lawyers around the country say they are hearing from lots of people like Mr. Haynes, and expect to hear from many more.

Final passage of the legislation by the House, set for April, is drawing near. The measure, which has the support of President Bush, could take effect as soon as this fall. The rules would make it harder for individuals to walk away from their obligations if they can pay off at least some of their credit card bills or other debts.

"I will be sending out letters to clients saying if you have relatives or friends who are struggling, tell them not to wait," said Norma Hammes, a consumer bankruptcy lawyer in San Jose, Calif.

Supporters of the legislation, which include credit unions, banks and retailers, say that the tougher qualifying rules will curb abusive bankruptcy filings.

Consumer bankruptcy filings have been falling since the end of 2003, with a total of 1.5 million in 2004, according to the Administrative Office of the United States Courts. A bankruptcy filing can leave consumers with a tarnished credit record for up to 10 years.

The most popular route for personal bankruptcy has been through Chapter 7 of the Federal Bankruptcy Code, which allows individuals and businesses to shed most unsecured debts not backed by assets, like their cars or homes.

The new legislation would make it difficult for individuals to file for Chapter 7 if their household income is greater than the median for their state. As a result, more individuals are expected to file for Chapter 13, which under the new law will require debtors to pay off at least a portion of their debts over at least five years, making it more difficult to get a fresh start.

A few studies suggest that the number of people affected will be relatively small. Some 3.5 percent of creditors who filed for Chapter 7 would be forced to shift their case to a Chapter 13 filing based on the new income standards imposed by the bill, according to a 1998 study sponsored by the American Bankruptcy Institute, a research group.

"Trying to snag debtors who really can pay is not what this bill was about," said Elizabeth Warren, a Harvard Law School professor who is among the loudest critics of the legislation. "This bill was about driving up costs for every family in financial trouble."

The legislation would also raise fees for filing Chapter 7 cases by 17 percent, to $245. Consumer bankruptcy lawyers say the increased paperwork required by the measure will cause their fees for Chapter 7 to rise by more than 25 percent, and the increases for the more expensive Chapter 13 filings could be even higher than that.

Some consumer bankruptcy lawyers say the new requirements will impose other burdens. Debtors will have to pull together more paperwork than previously required, including utility bills and tax returns and titles on their cars, making it increasingly time-consuming and expensive to file. Also, filers will be required to enroll in a credit counseling program to discuss alternative options, further delaying a person's ability to emerge from bankruptcy.

To qualify for Chapter 7, an individual's income would have to be less than his state's median household income. Consumer advocates say the standard is too restrictive for low- and middle-income families, given how widely the cost of living can vary from big cities to smaller communities. In New York, for example, the median is $42,432. In California the standard would be $48,113, while in Florida it would be $38,533.


Judges do have the discretion to waive the income standards in the case of extreme hardship. Still, some lawyers said, there will be individuals who, wary of relying on the courts, will be forced to make some hard decisions to meet the new standards.

"Many people could actually be forced to make an immoral decision and file for divorce," said Barbara May, a lawyer in Arden Hills, Minn. By doing so, she said, each partner would be assessed based on his or her individual income rather than as a couple.

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Still, the bill leaves some room for wealthier individuals to qualify for Chapter 7. For example, certain expenses will still be exempt under Chapter 7 from the minimum income threshold. These include contractual payments secured by a home or car.

"If I am paying for a Mercedes, a vacation home, or a home in Armonk that has a high-cost mortgage, those are deducted" from the means test, said Henry Hildebrand, a court-appointed bankruptcy trustee. An older car that works fine but is already paid off, he said, does not qualify.

The legislation does not address some existing exemptions, like those for homes and "asset protection trusts" in a handful of states.

For those who do file for Chapter 13, there will be tougher standards. For example, the debtor will be obligated to make payments on the original purchase price of a car bought two and half years before a bankruptcy filing. In the past, the debtor was required only to repay loans based on the car's present value, taking depreciation into account.

Lawyers say that the easiest route in the face of the myriad changes may be for individuals to take advantage of the old system while they can. Many people will file for Chapter 7 before the law changes, said Irwin L. Zalutsky, a Chicago lawyer who specializes in bankruptcy. Already, Mr. Zalutsky said, people like Mr. Haynes who have heard about the new legislation are contacting his office to set up appointments.

Over some 14 years, Mr. Haynes accumulated $55,000 in debt on 15 credit cards. He also borrowed $2,000 on his bank credit line, has $2,800 outstanding on a home equity line of credit and has borrowed against his life insurance policy.

"I have dug myself into a hole," he said. In December, he began paying off what he owes. He bought a software program that tracks the interest rates on his credit cards and started paying off the ones with the highest rates first.

So far, Mr. Haynes has paid off $300. He is going to continue to whittle down his debts, but his situation remains tenuous.

"I am barely making it," he said.

Posted by crimnos @ 1:04 PM