The Bankruptcy Lawyers Blog

While bankruptcy filings are up across the country as a result of the looming BAPCPA deadline, some state officials, including some in Tennessee, believe there will be little impact on individuals filing in their states.

Because of the relatively low median income - $35,000 in Tennessee, for example - state officials believe the new stringent Bankruptcy Means Test will leave many petitioners filing under Chapter 7, whereas states with a higher earning threshold will be more likely to see individuals forced to file under Chapter 13.

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Bankruptcy filings topped more than 467,000 during the second quarter of 2005, according to the Administrative Office of the U.S. Courts. Most of those filings were personal bankruptcy filings aimed at beating the Oct. 17 deadline imposed by BAPCPA.

There is no doubt that the law changes make filing for bankruptcy more difficult for both debtors and attorneys. What remains to be seen is whether the changes will make it harder for many people to qualify for bankruptcy protection, as many opponents of the new laws fear.

A recent study by Best Case Solutions, a company that specializes in legal software, suggests 85 percent of debtors who file bankruptcy will still be eligible to file under Chapter 7.

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Advocates of lower-income Americans are worried that the new changes in the bankruptcy laws will make it unattractive for lawyers to represent clients in pro-bono or reduced-fee bankruptcy filings.

While it used to take relatively little effort for attorneys to file bankruptcies on a pro-bono basis, the increased time, legal complexity and potential liability will create a huge disincentive to for attorneys to take these cases.

Consequently, many are speculating that low income individuals or families - ostensibly the ones who could benefit from filing for bankruptcy the most - will have to file 'pro se' cases because they can't afford to pay the increased attorney's fees, filing fees and costs. Worse, some "clients in need" may choose not to file at all, digging themselves deeper into debt.

Legal aid groups, who are already inundated with low income debtors, will receive yet more demands, and will have to scramble even more for funding to hire additional staff to help with handle the workload.

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BAPCPA mandates debtors participate in credit counseling briefing prior to filing bankruptcy and a debtor education course before the bankruptcy discharge. The increase in clients demanding these services has caused agencies to spring up in what could be unexpected places, according to a recent article in Seattle Weekly.

Nonprofit foundations like the North Seattle Community College Foundation, created to raise money for the college, has become a multi-million dollar credit counseling agency over the past seven years, but little of its profits are finding their way back to the organization it was initially designed to support.

From 1998 through June 2004, for example, the Seattle foundation took in $233.6 million and contributed only 1.2 percent of that to grants and scholarships.

Agencies including this one are drawing attention from the Senate, which finds in part that the foundation isn't even providing debtors much help.

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According to a recent article in CFO.com, the new bankruptcy laws could have a huge impact on entrepreneurs. That study shows that a segment of people who filed for personal bankruptcy in reality were small business owners who used their personal credit to launch or sustain their businesses.

According to research conducted by professors at Harvard Law School and the University of Nevada, Las Vegas, and supported by the Ewing Marion Kauffman Foundation, the US government reported about 37,000 small businesses filing for bankruptcy in 2003. However, the research shows that as many as 20 percent of consumer bankruptcy filings may really be business bankruptcies, putting the small business bankruptcies at closer to 260,000 or 315,000.

The Kauffman Foundation, which supports entrepreneurial education, fears that the new law changes will discourage consumers from starting their own businesses for fear that a business failure could translate into personal ruin.

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The Bankruptcy Abuse Prevention and Consumer Protection Act has caused anxiety for both consumers and attorneys alike. Consumers are worried - and rightly so - that they no longer will be able to qualify under Chapter 7, and that if they file under Chapter 13 they'll be required to pay back a bulk of their debts. Attorneys are put off by the filing process, which has become both time-consuming and labor-intensive, ultimately driving up costs for the debtors.

Bankruptcy filings rose from 200,000 in 1978 to more than 1.6 million last year, according to a recent article in the New York Times. Because of the law changes that go into effect in October, that number is expected to rise in 2005, by some estimates reaching 1.8 million. Nationwide, the filings have increased 12 percent in April, May and June from last year's numbers.

Other reports, including recent ones from Ohio and Kentucky, Mirror the New York Times' findings. In Ohio, for example, bankruptcy filings are on pace to increase by 6.2 percent over 2004.

Consequently, many bankruptcy attorneys are finding themselves swamped with clients hoping to beat the deadline.

Only time will tell whether filings continue to rise after the new laws are in place, or if they'll drop off dramatically because consumers find them too daunting.

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