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New Federal Bankruptcy Law
New Federal Bankruptcy Law
NEW FEDERAL BANKRUPTCY LAW AND REFORM: DID CONGRESS MEAN TO SHUT DOWN BANKRUPTCY?
You’ve likely heard about Bankruptcy reform new federal bankruptcy law, and how it’s gotten harder to file for Chapter 7 Bankruptcy, and that you may be forced to repay much more than before under a Chapter 13 Bankruptcy. Let’s look at what’s happened.
It’s been over a year after the recently demised Republican Congress was finally able to present to the President for signing into law the intact version of the amendments to the Bankruptcy Code that had failed to pass every session since the first administration of President Clinton. It is now almost two years since the “reform” went into effect. Insolvency professionals who have reviewed the impact of the amendments to the bankruptcy system during the period after passage attempted to gage the effects of the legislation. All have been surprised at the lasting dampener the changes have apparently caused.
As the date approached for the new federal bankruptcy law and amendments to become operational, October 17, 2005, those Americans in financial distress received and understood the message that the new federal bankruptcy law was going to make bankruptcy expensive, harsh and inflexible. For the 6 months up to 10/17 the number of bankruptcy filings doubled, then tripled. Court watchers knew that this rush to file was, in effect, advance filings of cases that would have been filed in the months after 10/17 but for the general warning about the new law. Conventional wisdom predicted that after 6-7 months the numbers would begin to creep back up until they reached levels comparable to pre-amendment by a year post-effective date of the amendments. All went as expected as to the drop, but what has not materialized anywhere is the return to
normal filing bankruptcy numbers. There are indications, because it is now more than 15 months since the big change that the system may have lost credibility, and Americans may be beginning to turn away from the bankruptcy system as their primary means of dealing with insurmountable debt. This may be true for two reasons: 1) alternatives to bankruptcy such as debt settlement and debt management have become more viable due to industry shakeouts of the less service oriented organizations, and Americans are better acquainted with these processes; and 2) these amendments to bankruptcy that are the subject here have created onerous additional requirements and expense to filing bankruptcy.
These disincentives to file are timed to occur at the beginning of a new bankruptcy case and constitute an even more significant barrier to filing because of the timing. For example, a couple who has been struggling mightily to make their monthly payments concludes that they have reached the end of their financial rope and they need to file for protection right away. They contact an attorney and learn that they would first need to complete a briefing at an approved Consumer Credit Counseling Service (CCCS). They are referred to the Department of Justice website to view the approved list of CCCS firms, but the nearest approved office could be in
a neighboring state. They must contact an internet based company and arrange a long-distance class, and pay the required $100 fee. The attorney quoted a $1,500 retainer payable before any work is performed with an hourly fee of $250 and said that since he would have to personally audit all of the supporting documents supplied by the client and personally perform an inventory and market appraisal of the home to expect the total hours beyond the retainer to run about 15-20, payable as they are billed. The attorney also stated that there could be no presumption of confidentiality between them. Surprised and rather shaken, they called the offices of all ten of the attorneys listed last year in the local directory as practicing bankruptcy. Of them, only three active practitioners remained. The couple decided to go online and check out the debt settlement companies. They had already submitted their figures to several CCCS firms online, but realized that the widening chasm between their aggregate debt and their incomes would require a more radical approach. So, they may have tossed in the towel and just picked the best debt settlement company for them.
Continue on to part 2 of new federal bankruptcy law and reform.
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