Bankruptcy - A year After Reform

By Julie Kay
Daily Business Review
October 11, 2006

As the banking industry-backed law to limit personal bankruptcies nears its first anniversary, there is sharp disagreement about whether the law is working well or causing widespread hardship.

Many South Florida consumer bankruptcy attorneys and judges say their predictions that the law would place greater obstacles on lower- and middle-class people who have legitimate reasons for seeking to discharge their debts have come true.   
                                                                                      Beverly Fox
The law has increased legal costs, made it harder for consumers to find lawyers and forced them to go through what’s widely seen as useless credit counseling, according to a new survey by the National Association of Consumer Bankruptcy Attorneys, which strongly opposed the 2005 law. And it has scared away many who would qualify for bankruptcy protections.

Supporters of the law, the Bankruptcy Abuse Prevention and Consumer Protection Act, agree that the new rules — which took effect last October — have made it harder to file for personal bankruptcy, as Congress intended. They say too many Americans were racking up frivolous credit card debt, then discharging the unsecured debt through Chapter 7 bankruptcy cases.

Groups that backed the new law are pleased that the number of Chapter 7 filings has dropped dramatically this year. But they say the law still allows lower-income Americans who face financial misfortune to discharge their debts.

Representatives of the U.S. Chamber of Commerce did not return calls for comment. But Laura Fisher, a spokeswoman for the American Bankers Association, told the St. Petersburg Times that “there are signs that some of the abuse has been wrung out of the system.”

“Lending creditors are happy with the new law,” said Michael Goldberg, a partner at Akerman Senterfitt in Fort Lauderdale who represents creditors in bankruptcies but who says the new law needs tweaking. “It’s not as easy for people to discharge their debts. But changes need to be made to the law.”

Paul Hyman, chief judge of the U.S. Bankruptcy Court for the Southern District of Florida, remains critical of the new law. Prior to the law’s passage, “There was very little fraud in the bankruptcy system and that still remains true. The vast majority of bankruptcies are caused by lack of health insurance, a change in job status or a combination of both. The law … has simply increased the burden on debtors and debtors’ attorneys.”

More paperwork and costs

The law, with its tough new requirements, has doubled the amount of time that consumer bankruptcy attorneys must spend on cases, and thus has forced them to significantly raise their fees, according to the new survey, which was based on responses from 700 consumer bankruptcy lawyers around the country.

The survey also found that, contrary to what many experts predicted, fewer than one-third of bankruptcy attorneys are seeing an increase in cases being shifted from Chapter 7 to Chapter 13. Chapter 13 requires debtors to enter extended repayment plans rather than promptly wipe out unsecured debt.

“The primary impact of the new law appears to be more paperwork hassles and higher expenses for already cash-strapped consumers,” the association said in a teleconference last week.

Still, South Florida bankruptcy judges and lawyers say the public perception that people can no longer file for personal bankruptcy is wrong. Clever attorneys well-versed in the new law still get many of their clients through Chapter 7 or Chapter 13 bankruptcies.

The association also found that Chapter 7 filings are starting to rebound. More than two-thirds of respondents said their bankruptcy filings are up in the third quarter of 2006, compared with the first half of the year. Nearly three out of five bankruptcy attorneys surveyed said they expect filings to reach their previous levels by the law’s second anniversary in 2007.

Judge Hyman said bankruptcy filings are starting to rise slowly but are down 80 percent so far this year from the same period last year.

In the 12-month period from last October, when the law took effect, to mid-September, there were 3,482 Chapter 7 filings and 1,340 Chapter 13 filings in the Southern District. In contrast, in 2005 — including the period before the law when debtors rushed to file — Chapter 7 filings totaled 31,062 while Chapter 13 filings totaled 4,706. In 2004, there were 9,713 Chapter 7 filings and 5,762 Chapter 13 filings.

Hyman attributed the drop to public perception that the law blocks people from filing for personal bankruptcy. That’s simply not true, he said. “The new law should not keep individuals who need to file for bankruptcy from doing so,” he said.

Means test

One of the most controversial provisions of the new law generally blocks Americans whose income exceeds their state’s median household income — in Florida, about $39,000 a year for single filers and $62,269 for a family of four — from filing for Chapter 7 protection.

Because of that unprecedented income limit, a substantial number of Chapter 7 filers were expected to be forced into Chapter 13, which requires them to make payments to creditors for up to five years.

But some people who earn more than the median income still can file Chapter 7 bankruptcies if they have unusually high but justified expenses such as costs associated with having a disabled child, experts say.

South Florida bankruptcy lawyers and judges say the vast majority of those filing for Chapter 7 bankruptcy qualify under the new code. Supporters of the bill said that only about 5 percent of Chapter 7 filers would no longer qualify.

“I’ve had three cases that were mandated to be filed [Chapter] 13 that would have been [Chapter 7s] under the old law. That’s it,” said Beverly Fox, a Plantation bankruptcy attorney. “The concept of the new law was to make it less possible to file Chapter 7, but there are ways around that. It hasn’t really changed.”

Experts say that most bankruptcy filers are unable to substantially pay back creditors. Nationally, a minuscule number of Chapter 13 filers are able to maintain their repayment schedules. In South Florida, the repayment rate is somewhat higher because bankruptcy trustees here garnish paychecks, Hyman said.

Jacked up fees

Since the new law, many lawyers have left the consumer bankruptcy field or reduced their activity. One reason is that the law for the first time requires lawyers representing bankruptcy filers to attest to the truth of their clients’ financial statements.

Lawyers were worried about the potential new liability exposure under that provision, said Tina Talarchyk, outgoing president of the Bankruptcy Bar Association of the Southern District of Florida.

“The fear among lawyers was, ‘How do you do enough due diligence to determine the accuracy of the debtors filing,’ ” said Talarchyk, a partner at Squire Sanders & Dempsey in West Palm Beach. “A lot of these fears came to fruition.”

But Henry Sommer, a Philadelphia attorney who serves as president of the consumer bankruptcy lawyers group, said no lawyers have faced sanctions under this provision so far.

Lawyers who have stayed in the field have jacked up their prices to offset the additional time they are spending on cases. “It’s generating a lot more paperwork,” Fox said.

As a result, she has raised her fixed fee for a standard Chapter 7 from $1,200 to $1,500. That $300 increase is less than the national average of $500 increases the NACBA predicted bankruptcy attorneys would start charging after the law’s passage.

“I’ve absorbed some of the higher costs,” Fox said. “I have a lot of elderly clients making $1,600 a month in Social Security, and I don’t want to give them a heart attack.”

Neil Tannenbaum, a Fort Lauderdale bankruptcy lawyer, raised his standard fee from $850 to $1,000. In addition to that cost, debtors must pay the $300 filing fee plus $50 to take a credit counseling course.

“That’s a heavy burden on lower and middle class [debtors],” Tannenbaum said. “I have clients who don’t even have the $50 for the course.”

Tannenbaum, who handles only Chapter 7s, has seen a reduction in business this year. He is handling about five cases a month now. In the month before the law went into effect — when many people rushed to file — he had 40 cases.

But, he argued, the new law’s income requirement is set too low, and the allowable income for filing Chapter 7 needs to be raised. “People earning $50,000 a year can have significant expenses,” he said.

Counseling a joke

Under the new law, bankruptcy filers are required to go through credit counseling at approved nonprofit credit counseling agencies before their petition can be processed. Filers must complete a four-hour course on the phone or the Internet, similar to a traffic ticket course.

Most bankruptcy judges and attorneys think that requirement is a joke. “My clients are told to buy clothes at a consignment shop and shop at Sam’s Club,” Fox said. “They tell me, ‘How do they think I’ve been surviving?’ These people are not children. They already know how to cut corners.”

“In the vast majority of cases, counseling isn’t going to help,” agreed U.S. Bankruptcy Judge John K. Olson in Fort Lauderdale.

Olson cited a recent case of a man who was living in a homeless shelter, had no assets and did not go to credit counseling. “I was forced to dismiss the case,” he said. “What a guy in a homeless shelter is going to do with credit counseling is beyond me. It’s so silly.”

Olson said he is baffled by the new law. “From the beginning of the Republic, we’ve had a belief that people who were down on their luck deserved a fresh start,” he said. “To force them to keep paying on old debt creates a permanent class of debtors. You scratch your head and wonder why.”

Julie Kay can be reached at jkay@alm.com or at (954) 468-2622.

Beverly Fox photos by Michael McElroy

Bush Signs Bankruptcy Reform Into Law
Under New Law, Federal Judges Will Decide Who Must Repay Debt

By Nedra Pickler
Associated Press
April 20, 2005

President Bush signed the biggest rewrite of U.S. bankruptcy law in a quarter century on Wednesday, making it harder for debt-ridden Americans to wipe out their obligations.

''Bankruptcy should always be a last resort in our legal system,'' Bush said. ''If someone does not pay his or her debts the rest of society ends up paying them.''

Many debtors will have to work out repayment plans instead of having their obligations erased in bankruptcy court under the law, which will go into effect in six months. The 500-page legislation won final congressional approval last week after being pushed for eight years by banks and credit card companies.

The measure would require people with incomes above a certain level to pay some or all of their credit-card charges, medical bills and other obligations under a court-ordered bankruptcy plan.

Bush said the new law makes the financial system fairer for debtors and creditors.

''The act of Congress I sign today will protect those who legitimately need help, stop those who try to commit fraud and bring greater stability and fairness to our financial system,'' Bush said.

Those who fought the bill's passage said the change will fall especially hard on low-income working people, single mothers, minorities and the elderly and will remove a safety net for those who have lost their jobs or face crushing medical bills.

The financial services industry argued that bankruptcy frequently is the last refuge of gamblers, impulsive shoppers, divorced or separated fathers avoiding child support, and multimillionaires who buy mansions in states with liberal homestead exemptions to shelter assets from creditors.

''In recent years too many people have abused the bankruptcy laws,'' Bush said. ''They walked away from debts even when they had the ability to repay them.''

New personal bankruptcy filings edged down from 1,613,097 in the year ending June 30, 2003, to 1,599,986 in the year ending last June 30, breaking an upward trend of recent years.

Between 30,000 and 210,000 people - from about 4 percent to 20 percent of those who dissolve their debts in bankruptcy each year in exchange for forfeiting some assets - would be disqualified from doing so under the legislation, according to the American Bankruptcy Institute.

Those people have six months until the law takes effect to escape the tougher guidelines. Bankruptcy attorneys have said they anticipate a rush to the courthouse.

Under the current system, a federal bankruptcy judge determines whether individuals must repay some or all of their debt.

Under the new law, those with insufficient assets or income could still file a Chapter 7 bankruptcy, which, if approved by a judge, erases debts entirely after certain assets are forfeited. Those with income above their state's median income who can pay at least $6,000 over five years - $100 a month - would be forced into Chapter 13, where a judge would then order a repayment plan.

House Oks Bankruptcy Bill

New York Post
April 15, 2005

Tens of thousands of people looking to wipe out their debt in bankruptcy court will have to work out repayment plans, under legislation just approved by Congress.

Yesterday, a 302-126 House vote sent the legislation to President Bush, who has said he's eager to sign the biggest rewrite of the bankruptcy code in a quarter-century.

This marks the second major legal change to benefit business since the Republicans increased their majorities in the House and Senate in last fall's elections.

The House debate was acrimonious, as Democrats warned that the measure would hurt the economically vulnerable. The legislation, which garnered some Democratic votes, cleared the Senate last month on a 74-25 vote.

The measure would require people with incomes above a certain level to pay credit-card charges, medical bills and other obligations under a court- ordered bankruptcy plan.

Opponents say the change will especially hurt low-income working people, single moms, minorities and the elderly. AP

Legislation Would Limit Protection of Doctors' Assets
Doctors in South Florida May Be Hit Hard by
a Proposed Bankruptcy Bill in Washington,
Which  Focuses on Homes and Retirement Accounts.
 

By John Dorschner
Miami Herald
March 27, 2005

Bankruptcy legislation now moving quickly through Congress may have huge consequences for South Florida doctors.

Aimed primarily at those who build up massive credit-card debt, the bill would limit the money that could be protected in a home and retirement accounts -- and would require persons with above-average income to pay off debts over some years even if they declare bankruptcy.

It could have a big impact in South Florida because about a third to half of the doctors in the area don't have malpractice insurance, and most of them have sought ways to protect their assets so that they can go into bankruptcy if they are hit with a large judgment.

The bill has been approved by the Senate and is expected to pass the House in the next several weeks. President Bush has already said he would sign it into law.

If that happens, doctors say that could put a horrific squeeze on them. ''You could see quite a few doctors retire or move to another state,'' says Gary Gieseke, a Broward neurosurgeon who has no insurance.

Plaintiffs' attorneys see things differently. Miami lawyer Neal Roth applauds the Congressional effort. ``The system should be much more equitable so that the injured patient can at least get some substantial relief.''

Robert J. Mills of the American Medical Association says the AMA has taken no position on the bill because it appears to affect few in its membership. ``There seems to be a lot of unrest among physicians . . . in and around southern Florida. . . But we're not hearing from anyone else in the country.''

The reason is that physicians in most other areas of the country have more affordable malpractice premiums.

Gieseke says he knows a Broward neurosurgeon who recently moved to California, where he pays $38,000 a year for $1 million coverage. Here, if they can get insurance, many surgeons face paying $150,000 to $200,000 for $250,000 of coverage. Most opt to ''go bare'' and drop their policy.

What's more, a state survey shows 60 percent of those who do buy insurance get the minimum $250,000 -- not much protection when major malpractice judgments can run into the millions.

''Any doctor in that kind of situation would be incredibly irresponsible not to have a plan to protect his life savings,'' says Marc Singer, whose Coral Gables wealth management firm Singer Xenos has 450 physicians as clients, including neurosurgeon Gieseke.

High malpractice premiums may mean ''Florida is the worst state to practice medicine,'' says Singer, but ''it is the best in the country, bar none'' in allowing persons to protect assets from bankruptcy.

The state has several provisions few others have: A person's home, insurance, annuities and retirement accounts are safe from creditors, no matter how much money a person has invested in them. Only Texas comes close to this, says Singer.

The Florida homestead provision has led people like former baseball commissioner Bowie Kuhn to buy expensive mansions in Florida just before filing bankruptcy elsewhere.

Singer says he gives doctors three basic pieces of advice: Put as much money into your home and retirement fund as possible, and transfer as much of the rest as possible to the spouse.

Two of those three recommendations could be endangered by the new legislation, which has been pushed heavily by credit card companies, seeking to recover at least a portion of what they lose in bankruptcy proceedings.

But some provisions target the well-to-do. One would allow a debtor to protect no more than $125,000 in a home if it was purchased within 40 months of bankruptcy. Singer notes malpractice cases often take a long time to resolve, so doctors can probably work around that.

Another provision would not protect anything over $1 million in Individual Retirement Accounts.

That could threaten older doctors who have built up large nest eggs and could force them to retire earlier than they planned, says Gieseke.

Specifics about this provision are still not clear, and some other kinds of pension funds could still have unlimited protection.

The biggest change in the bill is a clause that means those with family incomes above $58,000 in Florida may be forced out of Chapter 7 of the bankruptcy law, which wipes the slate clean, into Chapter 13 or 11, which requires debtors to come up with a plan to repay at least part of their debt over the next five years of income.

How much is enough?

Singer's fear is that a judge might order a doctor to pay $150,000 a year or more of his $200,000 salary to satisfy a huge claim. ''That might force him out of business,'' Singer says.

However, Jeff Morris, resident scholar at the American Bankruptcy Institute, says judges must allow debtors certain acceptable levels for living expenses, although not necessarily the standard of living doctors are used to.

Roth and other attorneys who pursue malpractice cases think it's an outrage that highly paid doctors aren't forced to pay when their errors ruin the lives of their patients. ''The doctor has a moral, ethical and financial responsibility,'' Roth says.

Huge Judgments

ieseke the neurosurgeon says, ''If a doctor did something really bad that was definitely malpractice, I think he ought to pay for it. But a lot of times there is just a poor outcome in which everyone did everything they could,'' and still the doctor gets stuck with a huge judgment.

Gieseke says he knows of three Broward neurosurgeons who have left the state because of the malpractice costs here, and three others who have gone to work for large institutions, which assumed their malpractice risk. He says he knows of only five neurosurgeons remaining in private practice in Broward, and that number could keep shrinking.

Experts agree the new law is likely to change the playing field. At present, both Roth and Singer say bankruptcy is usually a threatened backdrop to possible litigation that never materializes. Singer says many doctors offer to settle for up to $250,000, which the state requires them to pay in liability cases in order to keep their licenses, and attorneys often accept settlements rather than go to trial against uninsured doctors and face getting nothing if the doctor goes bankrupt.

Under the new law, in which the doctors' future income can be targeted, Singer says ''attorneys are likely to become more aggressive'' in pursuing lawsuits.

Says Roth, the attorney: ``That's not a bad thing.''

A Bill Tightening Debt-Relief Rules             for Individuals Leaves Some Holes Unplugged By Kathleen Day and Caroline E. Mayer Washington Post March 20, 2005 It took eight years of political maneuvering, but a bill to overhaul the nation's bankruptcy system now looks close to becoming law. If it does, that's when the real fight will begin. Lawyers who have combed through the 501-page bill say that despite its attempt at specificity and bright-line tests to tell the truly destitute -- who would still get to erase most of their debts -- from the casual spendthrifts attempting to wriggle out of inconvenient bills, much remains open to For example, a key test for whether someone can qualify to wipe out almost all debts in bankruptcy would be based on whether the debtor's income is above the median for his state. Each state's median will be based on U.S. Census numbers -- the bill spells that out -- but would have to be adjusted for inflation, and how to calculate that adjustment has not yet been defined. The stated goal of the new legislation, which was pushed by the credit card, auto and retail industries, is to end abuse of the bankruptcy system. But many bankruptcy experts worry it will only add cost and red tape to the process of filing for bankruptcy and not necessarily curb abuse. Indeed, lawyers are already discussing ways that the legislation's hard-and-fast measures might make it easier than current law to manipulate the bankruptcy system. Joseph Gold, a bankruptcy trustee for eastern Virginia, predicted "many creative lawyers" will get around many of the new restrictions. Under current law, bankruptcy judges have wide discretion to determine who is unfairly filing under Chapter 7, a more pro-debtor bankruptcy option that allows filers to wipe out most of their debt. The new law would have more cut-and-dried formulas that judges would have to use to decide who is eligible for Chapter 7. If a person is ineligible for Chapter 7, he would file under Chapter 13, which requires some repayment of what is owed to creditors. Here's the test judges will now have to apply to people with income above the median in the state in which they live, with examples of how someone could purposely shape the results. • A debtor's reasonable monthly expenses will be subtracted from estimated monthly income. If the remainder, known as discretionary income, is below $100 a month, the debtor can file for Chapter 7. If discretionary income is over $100, the debtor might not be allowed to file for Chapter 7 argument and interpretation _____News Graphic_____   • Bankruptcy Protection: What is Chapter 7 and Chapter 13 bankruptcy? And how will the new bankruptcy legislation change them?   _____In Focus: Bankruptcy_____   • Keeping Some Hiding Places (The Washington Post, Mar 20, 2005)   _____3 Faces of Bankruptcy_____   • Interest, Late Fees Tripled The Card Companies' Bill (The Washington Post, Mar 20, 2005) • Penalties and Refusals Almost Everywhere He Turned (The Washington Post, Mar 20, 2005) • Ulcers and Credit Piled Up Debt (The Washington Post, Mar 20, 2005)   _____Color of Money_____   • Mandatory Counseling, A Good Idea in Theory: Michelle Singletary says the bankruptcy counseling provision in the bankruptcy bill "is there as a roadblock. It's a setup, lobbied for by banks and credit card companies, to steer people away from bankruptcy to debt repayment plans."   _____Cash Flow_____   • Tax Liens Complicate Bankruptcy Filings: Albert B. Crenshaw reminds readers that "[b]ankruptcy laws provide filers with protection from many kinds of creditors, but tax collectors generally are not among them."

Erasing Debts In Bankruptcy May Get Harder

by Marcy Gordon
Associated Press
March 9, 2005

Erasing medical bills, credit card charges and other debts in bankruptcy soon will become more difficult under landmark legislation that has vaulted its last major hurdle before Senate passage.

The legislation gliding toward congressional passage following Tuesday's procedural vote in the Senate would constitute the most sweeping overhaul of U.S. bankruptcy laws in a quarter-century.

Senate passage this week and likely House approval of that bill next month would deliver to President Bush the second of his pro-business legislative priorities after Republicans fattened their majorities in both chambers in November's elections.

Congress sent Bush a law last month placing most large multistate class action lawsuits under federal court jurisdiction, making it harder for plaintiffs to join together and win multimillion-dollar judgments in state courts.

Banks, credit card issuers and retailers have pushed for eight years for bankruptcy revisions that would force more people to repay at least part of their debt. It nearly passed in 2002 - failing when the Senate accepted, but House Republicans rejected, a Democratic amendment barring protesters from using bankruptcy to avoid paying court fines for blocking abortion clinics.

This year, with four more Republican senators, the abortion provision was rejected Tuesday on a 53-46 vote. Later the Senate voted 69-31 to limit further amendments, close the debate and hold a final vote this week.

The bill would set up a new test for measuring a debtor's ability to pay.

Those with insufficient assets or income could still file a Chapter 7 bankruptcy, which if approved by a judge erases debts entirely after certain assets are forfeited. But those with income above the state's median income who can pay at least $6,000 over five years - $100 a month - would be forced into Chapter 13, where a judge would then order a repayment plan.

Critics say that's unfair because many people who file for bankruptcy have lost their jobs, or are going to lose them.

According to current law, a bankruptcy judge determines under which chapter of the bankruptcy code a person falls - whether they have to repay some or all of their debt.

Sensing a long-elusive victory at hand, Republican backers exulted Tuesday and urged colleagues to move speedily through remaining Senate deliberations.

"The sooner we finish work in the Senate and get the bill to the House, the sooner our bankruptcy system will be focused as it should be on helping those with real need, and less vulnerable to abuse by consumers who have the ability to repay their debts," said Sen. Charles Grassley, R-Iowa, the bill's primary author.

The bill's supporters argued that bankruptcy frequently is the last refuge of gamblers, impulsive shoppers, divorced or separated fathers avoiding child support, and multimillionaires, often celebrities, who buy mansions in states with liberal homestead exemptions to shelter assets from creditors.

Opponents, too, have a litany of stories. Sen. Edward M. Kennedy, D-Mass., speaks of Zoraya Marrero, a single mother with three children from Woodbridge, Va., the eldest of whom has spina bifida. Having had to return $60,000 in state disability benefits and medical coverage for the child, and paying medical expenses, Marrero recently filed for bankruptcy.

Most applicants "did not seek bankruptcy relief willingly," Kennedy says. "Millions of ... Americans in similar situations have filed for bankruptcy only after exhausting all other options."

A recent Harvard University study found that costly illnesses led to about half of all personal bankruptcies and that most people who file for bankruptcy protection because of medical problems have health insurance.

Consumer and civil rights groups and unions say the legislation is unfair to low-income working people, single mothers, minorities and the elderly and would remove a safety net for those who have lost their jobs or face mounting medical bills. They say it would turn the bankruptcy courts into collection agencies for the credit card companies.

[Index to Articles]