Lawyers, Clients Hurry to File Bankruptcy Before Law Changes

Lawyer Kyle Havner of Pine Bluff is urging his clients to file bankruptcy now before massive bankruptcy reform laws become effective on Oct. 17.

There are very, very few of my clients better off under the new law than under the old, Havner said.

These days, bankruptcy attorneys are sprinting to the courthouses to file their clients claims. From January to April, bankruptcy filings were up 6.7 percent in Arkansas over the same period in 2004, from 8,368 to 8,928, according to statistics on file at the U.S. District Bankruptcy Court.

And more are expected. The new bankruptcy laws will make it more difficult for debtors to completely erase their debts in Chapter 7 proceedings. Most debtors will be pushed into Chapter 13, where a three- to five-year repayment plan will be developed.

The new bankruptcy laws also are expected to cause more headaches for bankruptcy lawyers.

Its going to take twice as much of my time to get one case through and filed than it does now, especially in the beginning, Havner said.

The American Bar Association has predicted that the new bankruptcy laws will be a disaster for the bankruptcy system. For the first time, debtors attorneys will be held personally liable for the accuracy of their clients filings, the association said.

The ABA fears that bankruptcy lawyers will be forced to hire private investigators and appraisers to verify their clients information, which will add thousands of dollars to the cost of a case, ABA Governmental Affairs Director Robert Evans said in a March 11 letter to senators.

Any attorney who fails to take these costly steps would be subject to harsh sanctions and civil penalties that malpractice policies are unlikely to cover, Evans wrote before the Senate approved the reform.

Evans painted a picture of debtors being unable to afford a lawyer, leaving thousands of debtors attempting to handle their own bankruptcies, resulting in the clogging of the courts.

But Samuel Gerdano, executive director of the American Bankruptcy Institute of Alexandria, Va., said he doesnt know how often the bankruptcy filings were wrong.

Nobody knows because its never been tested, he said.

Harold King, a bankruptcy lawyer in Little Rock, said debtors currently sign an affidavit saying the schedules are true. But occasionally we will get one that misleads us, lies to us, conceals. If we dont know about it, theres not much we can do about it, he said.

Congress, though, wanted to make the filing more accurate and thought placing the burden on the debtor wasnt enough.

You can at least theoretically understand where Congress is coming from, Gerdano said.

Havner said it might be too soon to determine the ramifications of the more than 500-page Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, which will overhaul the bankruptcy system.

Im not sure that we really know just yet how accountable bankruptcy attorneys will be, he said. If attorneys do some basic things, they should be fine, Havner said. And the new codes might not be as much of a migraine as originally thought.

Still, there will be stumbling around in the dark trying to figure out whats going on, Havner said.

New Codes

For years, the credit card and banking industries lobbied Congress to make the bankruptcy laws more stringent.

Current bankruptcy laws allow wealthy filers to walk away from billions of dollars in debt, on which they can afford to make some payments, Edward Yingling, executive vice president of the American Bankers Association, said in a March 2003 statement. This loophole carries a real cost for hard-working American families who pay for higher interest rates and increased costs of goods and services.

Yingling said in 2003 that the bankruptcy system was broken and needed to be fixed.

After the Senate passed the bankruptcy reform bill in March of this year and President Bush signed the bill into law on April 20, Yingling praised the move, saying the new codes make bankruptcy fairer. Now people who can afford to repay some of their debts will be forced to, rather than being able to walk away, he wrote in a statement.

Also, Yingling said the new codes will require placing child support and alimony ahead of legal fees.

The time has come for this fair and balanced bill to become law, he said.

But the new laws will take some getting used to. Under the new codes, a debtor will have to produce four years of tax returns, which can be a problem because people might not hold onto them for that long, Havner said. Or an ex-spouse might have the records and refuse to hand them over.

Other logistical nightmares include coming up with paycheck stubs from the past two months. Havner said some people toss the stubs after getting paid.

But the most significant change is if a debtor makes more than the median family income, which was around $32,500 in 2003 in Arkansas, according to the U.S. Census Bureau. For debtors in that position, it will be more difficult to file for Chapter 7 protection.

And if a debtor can pay $6,000 over five years, then he will be placed in Chapter 13, where the debts are reorganized, Havner said.

In addition, under the new bankruptcy codes, debtors now will have to go through credit counseling before they are discharged from bankruptcy.

It is going to be a hassle, Havner said.

That requirement could mean a boom time for businesses like Consumer Credit Counseling Service of North Little Rock. Consumer Credit Counseling is waiting on the new regulations before it gears up for the possible onslaught of new clients, said Linda Tucker, the companys director of education and marketing.

While the banks and credit card industry lobbied for the change in the laws, it is unclear whether theyll receive any more money from debtors, said Gerdano of the American Bankruptcy Institute. Changing the law doesnt necessarily translate into creditors getting more of their money back, he said.

The only way to know that is to test it over time, and thats what were about to do, Gerdano said.

Most of the people who file bankruptcy do so because of a divorce, runaway medical bills or unemployment.

John Blair, a bankruptcy attorney from Rogers, said the new bankruptcy codes probably wont be the windfall for the credit card companies.

The folks that arent paying their credit card debts still arent going to pay their credit card debts, Blair said.

More Cases

King, the Little Rock bankruptcy lawyer, said he is filing more bankruptcies these days as people are trying to beat the deadline.

To let people know about the October deadline, King has taken out an advertisement in the Sheridan Headlight. If people want to discharge debt or if they have a lot of debt problems, they had better file before the October deadline passes, King said.

As a result of the ad, Kings bankruptcy filings have doubled to about 40 a month now.

Blair also said that in his office he has seen the number of filings rise in the past couple of months.

I think everybody is concerned that the new bankruptcy laws might not let them either file or is going to be more restrictive on their filings, Blair said.

His office filed 20 bankruptcies in March and 47 in April.

The wave of hurry-up filings may well cause a steep decline after October. But Havner, the Pine Bluff lawyer, said he doesnt see the new codes lowering the overall amount of filings.

We might have more [Chapter] 13s It will have that effect, he said.