The Bankruptcy Lawyers Blog

As expected, many consumers who were thinking about declaring bankruptcy rushed to get in before the law changed this past October. An average week for bankruptcy filings was around 30,000 before the effects of the new law were felt, and in the week before the new law 479,430 people filed for bankruptcy!

In the weeks since the new bill was passed we've seen the number of consumers filing for bankruptcy fall to only 3,000 per week. That number seems to be on the rise, with 3,600 filings last week, as the market appears on course to return to normal.

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The U.S. Bankruptcy Court for the Western District of New York recently held that a debtor's failure to file a statement of intention in his Chapter 13 case did not result in the termination of the automatic stay under new Code section 362(h). In re Schlitzer, No. 05-80001 (Nov. 17, 2005).

In the case, a pro se debtor filed a Chapter 13 case but failed to file the Schedules and Statements required by Section 521 and Rule 1007, his Chapter 13 Monthly and Disposable Income Form or a Chapter 13 Plan.

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From the Washington Post:

Personal Bankruptcy Filings Fall Sharply

By Caroline E. Mayer
Washington Post Staff Writer
Tuesday, November 22, 2005; D03

In the month since a new bankruptcy law took effect, the number of Americans filing for protection from their creditors has slowed to a trickle, running at one-tenth the normal number of filings.

Last week, the nation's federal bankruptcy courts received about 3,600 petitions, according to Lundquist Consulting Inc., a California financial research firm that tracks bankruptcy data from the nation's courts. In a usual week, about 30,000 cases are filed.

Of course, nothing has been normal at the bankruptcy courts for the past few months, as the more restrictive law took effect on Oct. 17. In the week before the deadline, the number of cases filed reached 479,430, Lundquist said. The previous week, petitions totaled 124,037.

That surge explains why filings have dropped so low now, said Maryland lawyer Brett Weiss. "Just about everyone who was even thinking of filing filed before Oct. 17," he said.

The new law, long sought by the financial industry, makes it harder and more expensive for people to completely wipe out their debts under Chapter 7 bankruptcy.

Lundquist said filings last week averaged about 600 a day, slightly up from the previous two weeks, when new petitions were averaging 400 to 500 a day.

The lull will not last for long, Weiss predicted. "This spring is going to be a very busy time," he said, warning that this winter's expected high heating bills and a new federally mandated policy requiring higher minimum payments on credit card bills will push many financially strapped Americans over the edge.

Those who are filing for bankruptcy now are debtors who either procrastinated or are facing an imminent foreclosure, garnishment of wages or seizure of assets, Weiss said.

Locally, 25 cases were filed in the Alexandria bankruptcy court in the month after Oct. 17. Twelve of those were for Chapter 7. Last year, the Alexandria court received about 400 new cases a month -- almost all for Chapter 7.

In Maryland, about 320 personal bankruptcy cases were filed since Oct. 17, of which 138 were for Chapter 7. Last year, the courts received an average of 2,400 filings a month; about two-thirds of those were for Chapter 7.

In the District, 24 bankruptcies were filed in the last month, 14 under Chapter 7. Last year, filings averaged about 160 per month. About three-fourths of those were for Chapter 7.

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Of frightening note, the article points out that in 2004 there were 581,000 new businesses founded and 576,000 closed. The safety net has now diminished.

The Small Business Association states that small companies provide "roughly 3/4 of the net new jobs added to the economy and employ 1/2 of the private workforce".

The bottom line as illustrated by Professor White, "this would make the U.S. more like Germany, where bankrupty law has never provided a fresh start, risk taking is frowned upon, there are many fewer entrepreneurs, unemployment is higher and economic growth is slower."

Some excellent reading in this file:
Download file

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An interesting article from the Concord Monitor:

New law reduces bankruptcy filings
Only 28 cases since law changed Oct. 17

By JOELLE FARRELL
Monitor staff

More than 1,700 state residents filed for bankruptcy in the two weeks before October 17, when new federal legislation making it harder and more expensive to file became effective.

Since then, only 28 bankruptcy cases have been filed in U.S. Bankruptcy Court in Manchester, down from 73 cases during the same time period last year.

Some lawyers said fewer people are filing now because they rushed to file before the October deadline. Filings likely will increase after the holiday season, when credit card debt and heating costs can become overwhelming, lawyers interviewed yesterday said.

But even if the number of bankruptcy filings continue to decrease, it may not mean that the system, or people's financial troubles, are fixed. While some may be able to find an alternative to filing bankruptcy, others who face financial hardship from illness or divorce may struggle to pay the extra costs associated with the new law, said Mark Cornell, a Concord attorney.

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From the Warren Reports -- Original Article can be found at:
TPMCafe.com

Congress can change the bankruptcy laws, but those changes won't keep people from going broke. And, at least so far, no matter how hard they try to say it is over, the supporters of the new laws can't push bankruptcy out of the national conversation.

Eight years ago lobbyists described the bankruptcy bill as a speeding train that couldn't be stopped. That was a savvy estimate because all the money was on one side and all the hurting on the other--a perfect prescription for a change in the law. Besides, bankruptcy law was supposed to pass below the radar screen and not attract much attention in the popular press. But the stories just keep rolling in.

Nov 28, 2005 -- 02:29:53 PM EST

The sharp rise in filings just before the law took effect, followed by the sharp drop in filings in the weeks following the law, caught a lot of attention last week. New lawsuits challenging the constitutionality of the provisions in the bankruptcy laws that restrict what lawyers can tell their clients and how lawyers must describe themselves are generating more interest. And even the academic literature is beginning to catch up. A note in the most recent Yale Law Journal points out that despite the claims of the bill's supporters that the bankruptcy laws would help those trying to collect child support, no one has been fooled by the rhetoric; the new law undermines the relative position of support claimants.

Congress has not stayed out of the game. In the wake of Katrina, three bills have been introduced, two in the Senate and one in the House, all designed to give a better break to hurricane victims. Another new bill focuses on bankruptcy relief for people who are victimized by creditors who won't negotiate about past-due bills. Corporate responsibility for asbestos victims and pension promises are also on the bankruptcy radar screen.

I don't kid myself that Congress is on the verge of a big turn around, ready to renounce the credit card companies that paid for this legislation and try to help out ordinary working families. But I do wonder: The big time credit card lenders and their friends in Washington pushed this law through Congress, but could it be that the price they will pay isn't over?

The harsh realities of economic life for millions of hard-working Americans who get sick, who lose their jobs, or whose spouses take off, will stay in the news. Small businesses will struggle with the fallout from floods, rising interest rates, or poor market conditions. All of these people will need a way to deal with collection calls and mortgage foreclosures, a reason to get up in the morning and go to work and a way to protect their children from debt collectors all afternoon.

The bankruptcy wars aren't over.

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The new bankruptcy law has risen an immense ammount of controversy as its effects begin to be felt. From the individual consumer filing for bankruptcy to the lawyer facing new fees and responsibilities, the new bankruptcy laws have had far-reaching effects. Continue reading below to find a meaty article written by Nicholas Kulish examining how the law has effected America. The effectiveness and fairness of the new law will certianly be discussed for years to come.

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An article in the December issue of Scientic American is the newest in a long line of recent public interest in bankruptcy. Citing a 1978 court decision which allowed national banks to charge interest rates determined in their home state, the article examines where our current debt-heavy culture spawned. It appears that since allowing banks to charge high interest rates, more consumers were drawn into debt (credit card companies could afford to give cards to less-qualified customers at these higher rates). Today the trend continues as applications for credit become less personal, and feel more anonymous. This rising ability for less-qualified individuals to recieve credit does not appear to be effectively fought by new bankruptcy laws. Despite BARF's attempts to make it more diffucult to file for chapter 7 bankruptcy, bankruptcy experts, "tend to be skeptical or noncommital about the effictiveness in reducing filings." Look for this article to be available at the Scientific American website soon.

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Arguing that the BAPCPA violates the first and fifth amendment rights of both attorneys and consumers, a Minnesota firm, Milavetz, Gallop & Milavetz P.A., has challenged the act. The challenge argues against the act's ability to limit the advice an attorney can give to clients, especially due to the act's lack of specifics.

You can download the complaint as a pdf by clicking here.

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The Washington Post recently ran an article discussing Supreme Court nominee Samuel Alito's assertion in a 1985 essay that the constitution does not protect abortion. While Alito continues to look apealing to many conservatives, his record continues to reveal opinions and arguments which garner cringes from the left. Alito's views on abortion, afirmative action and gun control often flirt with the extreme right, and seem to indicate that his seat on the bench would be a seat firmly favoring republican ideals.

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The ramifications of the new Bankruptcy Act continue to be felt across the country. This article is another in a long string of articles we have seen lately examining the debtor's plight under the new laws. Michael Rappaport's article contains suggestiosns or how one can hopefully avoid facing bankruptcy in the first place - something we should all educate ourselves on. Especially interesting is the discussion of young people being sucked into a life-long debt habit, one that could cost them thousands of dollars over their lives if they blindly accept the use of all the credit cards being offered every day in this country.

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A large part of the new bankruptcy act is the requirement that debtors must now be investigated by their bankruptcy attorney. The attorney must complete a "reasonable investigation" of the debtor's financial affairs and assets before they can file. Recently, the Congressional Budget Office estimated that the cost of performing these investigations just for the year 2007 will be between $240 million and $800 million dollars, and would remain in that range for years to come.

Adding $800 million in costs to bankruptcy attorneys each year will serve to do little but increase the price of filing for bankruptcy in this country. Despite the obvious financial troubles of those looking to file, the new bankruptcy code has continued to demand more of the one thing these debtors do not have: cash. That $800 million dollars, even if it is spread across thousands of bankruptcy attorneys filing hundreds of cases a year, could easily still add up to a significant cost per case, a cost which will be passed directly to consumers trying to file for bankruptcy.

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There is an excellent Article in the November edition of the ABI Journal on this issue. The author (Thomas E. Ray) argues that the lack of uniformity of the exclusions under 707(b)(7), which is based on disparate median family income, renders the means test unconstitutional under Article 1, Section 8, of the Constitution. This Section grants to Congress the power to establish "uniform laws on the subject of bankruptcies throughout the United States." He argues that since the median family income varies from state to state the "uniformity" rule is violated. Because of disparities in median family income, a single debtor with an annual income under the means test of $50,000 in Connecticut would be excluded under 707(b)(7) from the presumption of abuse, while a debtor with the exact same CMI in Mississippi would be subject to the presumption and most likely a dismissal of his Chapter 7 case. Ray also argues that the second glaring lack of uniformity relates to the variances in living expenses under the means test. He cites the housing and utilities standards as the most non-uniform. He points out that the expenses not only change from state to state but from county to county within each state. For example, a family of 4 in Hamilton County, TN, would have an allowable monthly expense of $1,242, while a similar family in Polk County, TN, which is in the same judicial district, would have an allowable expenses of $935.00.

See Opinion by the late Justice Rehnquist in Railway Labor Executives Association v Gibbons, 455 U.S. 469, 473.

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A story in the Birmingham News quotes several Alabama bankruptcy attorneys who are not terribly concerned about the means test. According to bankruptcy attorney David Botes, the means test is "not a big deal, it's a red herring." In fact, he predicts that fewer than 10 percent of his clients who wish to file under Chapter 7 will be precluded from doing so because of the means test. Mr. Botes is much more concerned about the burdensome effects of the new tax filing rules (see my November 3rd post on this issue) and the credit counseling requirements.

Tom Reynolds, another Alabama bankruptcy practitioner who is also a local Chapter 7 Trustee, has a helpful tip for those seeking to avoid the pain of the means test. Because "the means test is based on wages during the six months prior to filing, ... some lawyers may have their clients file during a slow period of employment or while they are between jobs." In other words, simply timing the filing of your Chapter 7 case may help you get by the means test.

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I'm posting this for you from an editorial in the Providence Journal.

Troubling bankruptcy fix

01:00 AM EST on Tuesday, November 8, 2005

Across the country, thousands of people rushed last month to declare bankruptcy. In many cities, that meant standing in long lines. It also meant long hours for bankruptcy lawyers, who struggled to meet deadlines ahead of the change in the law, on Oct. 17.

The first significant overhaul of the bankruptcy law in a quarter-century makes it harder for people to clear away debt, under Chapter 7. Instead, more debtors will be forced to reorder their affairs under Chapter 13, which will oblige them to set up a five-year repayment plan. Within six months, these filers will also have to get credit counseling and financial education. Declaring bankruptcy will cost more, too: Because lawyers are required to do more paperwork, their charges are expected to rise, probably by a few hundred dollars per case.

It is clear who the winners in this setup are likely to be. Along with lawyers, credit-counseling agencies should profit. In fact, the law almost looks like a windfall of new business for them -- without money from Congress to pay for additional counseling. If the credit industry fails to up its contribution, counseling agencies are apt to get their piece of the action from the people seeking help.
Already, some counseling agencies have been accused of aggressively steering people into debt-management plans, and away from other options. Under these plans, according to a New York Times report, the debtor pays the agency with a single monthly check. After taking its slice, the agency is expected to divide the rest among creditors. Often, though, the debt never diminishes, even after years of payments.

The Internal Revenue Service is threatening to revoke the nonprofit status of some of these agencies. But it seems unlikely to get far, especially when there are so few to take on the expected steep increase in demand.

The other winners, of course, are credit-card companies, banks and merchants, all of which lobbied hard for the new law. The fact that Congress has done nothing to curb industry tricks to hide usurious credit-card interest rates and fees only magnifies the unfairness of the new law. Easy credit (and deceptive marketing) is what drove many Americans into debt in the first place.

The losers under the new law will largely be middle-income Americans: It targets people who make more than the median in their states. Often, though, these are people who have been hit with job loss, serious medical bills or divorce. Certainly, careless spenders ought to make amends, and it is clear that more prudent consumers are the ones who have paid the price of such profligacy, through higher costs for goods and credit. Unfortunately, the new bankruptcy law punishes the unlucky as well as the reckless.

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New Survey Report Reveals Truth Behind Credit Card Debt Explosion in the U.S.

--Citing Skyrocketing Costs, Dwindling Savings and Stagnant Wages, More American Families Are Turning To Credit Cards As Their Financial Safety Net

Article also located at: Center for Responsible Lending
October 12, 2005

Washington, D.C. "American families are turning to credit cards to make ends meet in an increasingly volatile economy, according to The Plastic Safety Net: The Reality Behind Credit Card Debt in America, a new report released today by Demos and the Center for Responsible Lending. Released just five days before the new bankruptcy law takes effect and effectively shuts the door on financial recovery for millions, The Plastic Safety Net presents new findings from a national survey on credit card debt among low- and middle-income households?¢‚Ǩ"those whose earnings fell between 50 percent and 120 percent of local median income. The survey provides new information about why households are in credit card debt, how long they have carried their debt and the impact this debt has had on their economic security.

Research shows that credit card debt in America has almost tripled since 1989 and increased 31 percent since 2000. Americans now owe some $800 billion in credit card debt. In addition, owing largely to job instability and medical costs, bankruptcies rose from 616,000 in 1989 to over 1.8 million in 2004.

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The following post portraying a day of crazed bankruptcy creditor meetings comes from The Shelby Starr

"It just takes a couple of bumps in the road to land in bankruptcy.

Just ask the crowd of folks who flooded the Cleveland County courthouse and surrounding parking lots Friday morning for bankruptcy court. Deputy M.V. Reavis said bailiffs were told to expect about a thousand people.

They reside in U.S. Bankruptcy Court's Western District of the state, which includes six counties.

They ranged from young adults to senior citizens. Some had young children in tow.

Friday was the first meeting with creditors.

In the courtroom handling Chapter 7 filings, pews were so full some people stood along the doors until a seat became available.

Trying to determine if his clients were in the courtroom, one attorney announced, "If I'm your attorney, would you raise your hand?"

Some blamed the economy, job losses, and most recently, a change in the state bankruptcy law - for the large crowd.

So there wouldn't be any surprises, many said their attorney forewarned them about the heavy number of cases.

Lamar Suttles considers himself one of the lucky ones. He was told he was free to go by 9:20 a.m.

The Morganton resident says child support is the primary reason he landed in Chapter 7 bankruptcy.

"Half my check's going - one for this, one for that."

On Oct. 17, a new bankruptcy law took effect under the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005.

"And that's one reason there's been such a rush," to file, said Huntersville Attorney Mike Elliott. "It severely limited their ability to file Chapter 7."

Most of the people in court Friday filed their cases about 30 days ago, he said.

He represented four clients in court Friday, but said he has about 50 he will represent in Charlotte in the next few weeks.

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The IRS just issued a press release providing a good summary of critical tax issues under BAPCPA. The relevant portion of the release follows below:

Tax Returns Must be Filed:

Under the new law, if debtors fail to file a return that becomes due after the date of their bankruptcy petition, or fail to file an extension, the IRS may request the Court to order a conversion (change from Chapter 7 to Chapter 11 or from Chapter 11 to Chapter 13, for example) or dismissal of the case. Conversion or dismissal may also be ordered if a Chapter 11 debtor fails to timely pay tax obligations owed after the date of the bankruptcy petition.

In order to have their plan confirmed, Chapter 13 debtors must also file all tax returns with the IRS for the four-year period before the bankruptcy petition. The debtor must establish filing by the first meeting of creditors.

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Below is an ABA report regarding the the liability of attorneys under the new bankruptcy laws. What should be taken from this article is that attorneys are reasponsible for checking up on their clients, but they are not expected to expend obscene ammounts of energy in the process. They key word is "reasonable".

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I've been reviewing Judge Alito's bankruptcy opinions in order to get a sense of how he would rule on bankruptcy cases should his nomination be confirmed by the Senate. Although he has authored a number of bankruptcy related decisions, only a few involved consumer bankruptcy issues. However, one opinion does not bode well for the consumer bankruptcy bar.

In Mathews v. Pineo, 19 F.3d 121 (3d Cir. 1994), he reversed a bankruptcy court decision which had discharged approximately $200,000 the debtor owed to the National Health Service Corps (NHSC) arising out of her receipt of a scholarship from the NHSC that required that she serve as a physician for a three-year period in a high-priority location determined by the NHSC in exchange for the scholarship.

The debtor received scholarships totaling more than $46,000, but she refused to serve in the location selected by NHSC. As a result, the NHSC sued her and obtained a judgment of more than $146,000 (the federal statute establishing the scholarship provides for treble damages and interest for a participant's failure to honor the service commitment). In response, she filed a Chapter 7 seeking to discharge the full amount of her debt to the NHSC, which had reached $400,000.

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The new bankruptcy code is a very dense, potentially confusing document. It can help to see the rules spelled out not only in detail, but in terms of how they effect you. This is a very nicely detailed article by Aleksandra Todorova running through all the ramifications of the new bankruptcy law for consumers.

By Aleksandra Todorova
October 31, 2005
The new bankruptcy law that took effect in mid-October requires filers of Chapter 7 or 13 bankruptcy to get credit counseling beforehand.

That might sound perfectly reasonable to the casual observer. But the requirement has raised concerns among bankruptcy practitioners and consumer-advocate groups, who say it will do little to aid those who are drowning in debt - and could even hurt.

According to the new requirement, people must go through a 90-minute counseling session six or fewer months before filing for bankruptcy and must attend a personal financial-management course in order to exit bankruptcy.

The rationale, according to Susan Keating, president and CEO of the National Foundation for Credit Counseling, a Silver Springs, Md.-based trade organization, is to help people make informed decisions. "The focus is to really work with every individual who walks in the door, help them review their personal financial circumstances and really understand what their options are for the future," she says. "That includes a full budget analysis and review and a discussion about what alternatives are available to them."

But problems abound. Here are the major concerns voiced by consumer groups, and some ways to address them.

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