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Bar News - February 22, 2008

Bankruptcy Reform 3 Years Later: Fewer Filings, Higher Costs



Three years after it took effect, it’s clear that the Bankruptcy Abuse Prevention and Consumer Protection Act is having its intended effect: fewer consumers are seeking Chapter 7 protection. Bankruptcy attorneys say the law is also having the effect of making the process more expensive for those who legitimately need debt relief, and making it a more difficult practice area for attorneys. 

Last year, according to the American Bankruptcy Institute, 1,235 people in New Hampshire filed for Chapter 7, or “liquidation,” bankruptcy – one-third of the number that filed in 2005 in anticipation of the sweeping bankruptcy reform law. There has been a slight increase in Chapter 13, “debt reorganization,” bankruptcy filings – a rise that has been attributed to the ailing real estate market and the resulting sub-prime mortgage crisis.


Numbers for fourth-quarter 2007 have yet to be released. Projections show a slight increase in overall filings, but estimates still remain well below those of the previous five years.


These results are exactly what legislators who passed the 2005 Bankruptcy Abuse Prevention and Consumer Protection Act had hoped for. New Hampshire’s bankruptcy lawyers, however, say the falling number of Chapter 7 filings is the product of confusion, misinformation and unjustifiably obtuse legislation, rather than a deterrent effect on abusers of the bankruptcy process.


“Many consumers have told me that they believed that the new law did away with bankruptcy,” said Salem attorney Richard Gaudreau a sole practitioner and NH chair of the National Association of Consumer Bankruptcy Attorneys. “The law has so many twists and turns now that it has become confusing for debtors.”


Supporters of the new Act claimed its provisions would curb bankruptcy abuse by wealthy filers who chose bankruptcy as an “easy out” from paying their debts. Many attorneys in the practice area say that the problem of abuse was exaggerated, and that the obstacles created by the new law cause more of a problem, by placing unnecessary and expensive obstacles in the path of those seeking a fresh start.


“Creditors could challenge the dischargeability of debts; trustees or the Department of Justice could prosecute those who don’t disclose assets, and cases could be dismissed if it seemed there was abuse,” says Jennifer Rood, an attorney specializing in bankruptcy law, at Manchester firm Bernstein, Shur, Sawyer and Nelson. “It has just created barriers to people with legitimate debt problems.”


Gaudreau says those barriers unnecessarily raise costs for attorneys and their clients.


“We’re spending a lot more time than we used to and it’s mostly administrative; it drives up the costs, which is the worst thing that could happen for someone already facing bankruptcy,” Gaudreau says. “We’re getting them (clients) to the same place, but from a client’s perspective; it’s much more difficult and expensive.”


The cost of simply filing for bankruptcy has increased: Chapter 7 filing fees are now $299 and filing fees for Chapter 13 are $274.


The Reform Act also makes credit counseling and financial management courses mandatory in order file for bankruptcy. Gaudreau says that credit counseling is often wasted time and money. “By the time these people get to bankruptcy they’re too far gone for credit counseling to be useful,” he says. “The US General Accounting Office studied the effectiveness of the credit counseling requirement and found that it is not an effective alternative to bankruptcy.”         


The biggest change imposed by the Act is the requirement for filer’s to undergo a “means test.” First, the filer’s yearly income is compared with that of the state’s median yearly income (In New Hampshire that amount, for a family of four, is $84,115.). If the filer’s income is below that level, he or she can file a Chapter 7. However, if the filer’s income is above the median, the likelihood of a filer being approved for a Chapter 7 drops off, and pending a calculation of monthly expendable income using IRS guidelines for average home expenses, becomes a distant possibility. In cases where a filer earns more than the median yearly and has more than $166.67 of expendable income per month, a Chapter 13 becomes the only option available.


But attorneys argue that the means test more often creates unnecessary confusion, since most of those filing for bankruptcy are well below the median income requirements. Those who have “above-median” income often do not have sufficient cash flow to fund a Chapter 13 plan.


“The means test doesn’t reflect reality,” says Rood. “It’s a complication that nobody needs.”


The Act also places more responsibility, and liability, on attorneys. For instance, much stricter reporting guidelines place a degree of responsibility on the attorney in the event of incorrect reporting of income verification and debt research processes. Many of the new responsibilities, Gaudreau says, intimidated those who’d practiced bankruptcy as part of their general practice.


“Virtually all the attorneys that filed an occasional bankruptcy before [the Act] have stopped doing that. I’d estimate that the number of attorneys representing consumers in bankruptcies in NH has diminished by about 75 percent since [2005]. Bankruptcy has become much more of a boutique practice, like patent and tax law,” Gaudreau says.


This lack of practicing bankruptcy attorneys could lead to problems as the full effects of the mortgage collapse and potential recession begin to show themselves and as the bankruptcy rates climb, as Rood believes they will.


“Until very recently, credit has been widely available the last couple of years in the form of home equity lines and other credit lines.  There was lots of money around,” she says. “As credit has tightened and overall economic conditions worsened, filings are starting to go back up. If current trends continue, I would expect to see a bit of an increase in 2008.”


The full effects of the Act have yet to be felt, but many in the legal community agree that it places the practice of bankruptcy law in a slightly precarious position. And while the law continues to be criticized, Rood says the actual impact is not as bad as was expected in 2004, when press and consumer groups decried the Bankruptcy Act as a bill that preyed mercilessly on consumers.


“I don’t think it’s been as catastrophic as some have said, but there were already measures in place [to prevent abuse],” Rood says. “It definitely is more difficult [to file], but it isn’t impossible.”




Bankruptcy Resources – Home Page of the American Bankruptcy Institute Office of the US Courts’ Amended Bankruptcy Forms

www.nacba.comHome Page of the National Association of Consumer Bankruptcy Attorneys Trustee’s Office Web site


Also note that the NHBA-CLE Department will host a seminar, Recent Developments: BAPCPA in Practice, on Wednesday, March 5, 2008 at the NHBA Seminar Room from 9:00 a.m. to 4:30 p.m. The seminar will cover procedural and substantive topics related to the Bankruptcy Abuse Prevention and Consumer Protection Act. Click for more information. 

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