Bankruptcy attorneys are gearing up for an anticipated blizzard of business before the new federal bankruptcy overhaul bill goes into effect later this year.
The American Bankruptcy Institute (ABI) reported that between 30,000 and 210,000 people who dissolve their debts in bankruptcy each year in exchange for forfeiting some assets would be disqualified under the new bankruptcy reform bill.
“I had 30 calls this morning,” James E. Renfroe said a half-hour after President George W. Bush signed the bill into law April 20. Renfroe is a partner with Perrilloux & Associates in Flowood, and represents 150 to 200 creditors and consumers per year in bankruptcy filings.
Partly in anticipation of Congress passing the new law, a record number of bankruptcies have already been filed in 2005, according to the ABI.
“Because the changes and restrictions in the Bankruptcy Abuse Prevention, Consumer Protection Act will greatly restrict the relief to consumer debtors and will increase the cost of filing a bankruptcy case, I think there will be a flood of consumer cases filed before the effective date, which generally is 180 days from the date of enactment,” said Steve Rosenblatt, chairman of Butler Snow’s executive committee and a member of the law firm’s financial services group. “The consumer debtor attorneys had better build up a significant ‘inventory’ of cases, because I believe the number of consumer cases filed after the effective date will decrease dramatically.”
Among the significant provisions of the new law, debtors with income above the state’s median income who can pay at least $6,000 over five years, or $100 per month, will be forced into Chapter 13, in which the bankruptcy court would order a repayment plan. Mississippi’s median income is $30,761.
“I’m fearful for the consumers who really need to file,” said Renfroe. “Some will be hurt, but there’s not much we can do about it.”
The controversial rewrite of the nation’s bankruptcy code will increase the workload for bankruptcy attorneys, who will be required to certify clients’ debt schedules, an extra step that may require costly financial audits. Under new Bankruptcy Code Section 526, consumer debtor’s counselors are subject to a loss of fees, damages, injunctive remedies and costs for any failure to meet the new disclosure and record-keeping requirements.
“I don’t see it as the apocalypse,” said ABI executive director Samuel Gerdano. “We don’t know yet how the bankruptcy courts will view it. It’s not a self-executing law or the creditor’s view to impose sanctions. The courts will still have some discretion. Early on, they may be more forgiving of attorney error.”
Boyd P. Atkinson, a creditor rights attorney from Cleveland, said the new law should stifle “some of the creativeness going on in bankruptcy filings, more commonly found in Chapter 13 than Chapter 7.”
The original legislation called for attorneys to be held liable “even for valuations on property, which obviously as an attorney, there’s no way to do that … because you’d be held liable for a client lying to you,” said Renfroe. “Then you couldn’t get access to errors and omissions insurance. I understand some of that got scaled back.”
The Congressional Budget Office estimated that complying with the provisions of the bill would increase attorney costs by $150 to $500, with “some of those additional costs … likely passed onto their clients.”
“I believe these new obligations placed on consumer debtor bankruptcy counsel will drive a substantial number of these attorneys from this area of practice and will increase their cost of doing business because more due diligence will be required of them,” said Rosenblatt. “The net effect, I believe, is that this will increase the cost of an individual debtor filing a consumer bankruptcy case.”
The new law also mandates that bankruptcy lawyers advertise themselves as “debt relief agencies.” Proponents of the reform say the new law will discourage bankruptcy law firms operating as “bankruptcy mills” from pushing consumers into bankruptcy court until consumers fully understand the situation.
“‘Debt relief agency’ is a newly defined term as ‘any person who provides bankruptcy assistance to an assisted person in return for the payment of money or other valuable consideration,’” said Rosenblatt. “An ‘assisted person’ is defined in new Section 101(3) as ‘any person whose debts consist primarily of consumer debts and the value of whose nonexempt property is less than $150,000.’
“Attorneys must disclose to the public in their advertising that ‘we help people file for relief under the Bankruptcy Code.’ They cannot advise a debtor to incur more debt in contemplation of bankruptcy. They must disclose all their costs, enter into a written contract with the debtor, and disclose that an attorney is not necessary to file bankruptcy, among other disclosures. These consumer bankruptcy lawyers (now ‘debt relief agencies’) must retain for two years after the date the notice given to their clients (now ‘assisted persons’) and a copy of the notices of this rather lengthy statutorily required information.”
When President Bush signed the bill into law, he called it “common-sense reforms to our bankruptcy laws” that would restore “integrity to the bankruptcy process” and make the bankruptcy system “fairer for creditors and debtors” to “ensure that more Americans can get access to affordable credit.”
“We will have to see if these are the results of this legislation,” said Rosenblatt.
Contact MBJ contributing writer Lynne W. Jeter at email@example.com.
After eight years in the making, the Bankruptcy Abuse Prevention, Consumer Protection Act, will:
• Establish a new income test for measuring a debtor’s ability to repay;
• Require debtors to pay for credit counseling within 180 days prior to filing for bankruptcy protection;
• Place top priority on a spouse’s claims for child support among creditors’ claims on a debtor in bankruptcy;
• Provide special accommodations for active-duty service members, low-income veterans and those with serious medical conditions in the new means test for bankruptcy candidates;
• Restrict a state’s homestead exemption to $125,000 if the debtor bought a residence less than three years and four months before filing bankruptcy; and
• Allow Wall Street investment firms the right to work for a company before and after it files for bankruptcy protection.
Other significant provisions established:
• Mandatory debtor education approved by the U.S. Trustee prior to a Chapter 13 discharge;
• Minimum time between Chapter 7 discharges increased from six to eight years;
• Presumption of non-dischargibility for debts owed to a single creditor totaling more than $500 for luxury goods incurred within 90 days of filing and cash advances of $750 within 70 days of filing; and
• Limit on “lien stripping” for cars in Chapter 13.