Bankruptcy overhaul may do little


Given all the hype that the nation's bankruptcy system is poised for its most extensive overhaul in 27 years, many experts are sure that some things won't change.

"The question is how many families are in financial difficulty, and the bill won't change that one way or another," said Edward J. Janger, a professor at Brooklyn Law School.

Illness, divorce and job loss will remain the primary reasons behind bankruptcy filings, experts agree. Ultimately, the legislation designed to make it more difficult for consumers to walk away from their debts might not even reduce the number of personal bankruptcies, which reached 1.56 million last year. That's a 28 percent increase in five years.

After eight years of intense lobbying and tens of millions of dollars in campaign contributions from credit-card companies, the House could approve as early as today the 500-page bankruptcy bill passed by the Senate last month. President Bush has pledged to sign it.

Creditors have argued that change in the bankruptcy law is necessary to prevent consumers from abusing the system.

"The bill is not going to have an impact on 90 percent of filers," said Laura Fisher, a spokeswoman with the American Bankers Association. "It's targeted toward an estimated 5 percent of people who are higher-income filers and under the current system are walking away from debt that they can afford to repay."

Critics say abuse isn't rampant and that existing laws have ways to deal with such problems. They say creditors want to make it harder to file so that they can squeeze more payments and fees from debtors before they can enter bankruptcy court protection.

Debtors are likely to face more hurdles and higher costs, and have fewer lawyers to help them, said academics and bankruptcy lawyers. Those abusing the system will find new ways to get around the law, they said.

"It's going to bring the system to its knees in paperwork and confusion," said Jean Braucher, a law professor at the University of Arizona.

Many agree that during the six months between the time the president signs the bill and the time it takes effect, bankruptcy filings will rise as debtors try to get in under the old system.

A key element of the legislation is a means test for who can file under Chapter 7, where almost all debts are erased, and who must file under Chapter 13, where they repay a portion of their debt over five years under a plan set up by the bankruptcy court.

Under the bill, filers at or below the median income for their state would qualify for a Chapter 7, although the court could challenge that. Those above the median income would be candidates for Chapter 13 but they could still file under Chapter 7 if they don't meet a means test.

It's a complicated formula, but essentially the test looks at monthly income over the past six months and subtracts expenses based on Internal Revenue Service guidelines, which would include car and mortgage payments. If consumers have as little as $100 a month in disposable income, they could be required to file under Chapter 13. They could ask for an exception if they can show special circumstances.

Most filers today fall below the median income, so they would still be able to file under Chapter 7 yet would still have to go through all the paperwork.

In Maryland, the median income for a family of four in 2003 was $82,363, according to the Census Bureau.

"Given my experience in cases, I'm seeing so many debtors who are just broke," said David E. Rice, a bankruptcy lawyer and a Chapter 7 trustee in Baltimore. "I've just got to believe that 80 percent of the people currently filing aren't going to be affected by it."

And many academics don't expect a substantial uptick in Chapter 13 filings, either.

A 1999 study of more than 1,000 Chapter 7 cases, for example, found that less than 4 percent of filers would be forced into Chapter 13 under a proposed means test, said Marianne B. Culhane, a law professor at Nebraska's Creighton University and an author of the study.

Even those intent on gaming the system will still find ways to do so, experts said.

"People who are engaged in strategizing would continue to do the same thing. Why would that change?" said Jeffrey Morris, a resident scholar with the American Bankruptcy Institute in Virginia.

"There are all kinds of various perverse incentives," added Braucher. "If you run up your debt, you're actually more likely to pass the means test."

For example, adding credit-card debt more than three months before filing or buying a new car could change the outcome of the means test. Also, the formula looks at the average monthly income over the six months before filing, so someone could seek a lower paying job or, if unemployed, delay looking for work to stay under the median income, experts said.

Many agree that the costs of bankruptcy would go up for filers.

Lawyers will need to spend more time on the means testing and pass those costs on to consumers. Even before people can file, they must undergo credit counseling from an approved nonprofit. The fees are supposed to be reasonable and waived for those who can't afford them.

Also, lawyers could be held personally liable for the accuracy of a client's petition, which may push up the cost of malpractice insurance.

Some predict that lawyers who occasionally file bankruptcy petitions might stop doing so because of the liability and time commitment.

As a result of higher costs and fewer lawyers to take cases, more debtors might file on their own.

Or, there may be a growth in the number of petition preparers - people who are not lawyers but help consumers fill out the forms for lower fees than attorneys charge. Like the credit counseling industry that has been roiled by scandal, bad actors could spring up among preparers, Morris said.

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