Bankruptcy Reform Act:

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The bankruptcy business is booming as a result of the new Bankruptcy Reform Act President George Bush signed in April. But bankruptcy attorneys don’t necessarily consider this a boon and in the long run it could be a bust for just about everyone.

Since a major element of the Act serves to restrict the Chapter 7 filing option for many, practitioners and the courts in Wisconsin have noticed a steady flow of filings since the president mandated the measure in April. Those wishing to file Chapter 7 have six months from the signing until the new rules become effective in mid-October.

According to statistics from the U.S. Bankruptcy Court Eastern District, Chapter 7 filings jumped 18 percent in April and 26 percent in May and Chapter 13 filings dropped by five percent and 11 percent respectively. The numbers in the Western district show total filings are on the same track with a 20 percent total filing increase for the first four months of 2005.

Bruce Lanser, a noted Milwaukee bankruptcy attorney, says his practice mirrors what the numbers show as a trend toward trying to take advantage of current laws.

Rise in Filings

"We’ve seen an increase," Lanser ob-served. "There’s an awful lot of people I have consulted with over the years who have been on the fence for one reason or another, either because they wanted to wait to see if they could avoid bankruptcy or for whatever reason just weren’t prepared to pull the trigger.

"There have been an awful lot of people who contacted me because they saw the laws were changing, that was what sort of pushed them over. A lot of those people, they weren’t bankruptcy candidates before and they are not now, but certainly it has caused an increase in activity overall."

But talking with colleagues, Lanser said they noted that after the media moved away from the topic, client inquiries seemed to trail off a tad but filings definitely are fertile.

Lanser also works part time as a bankruptcy trustee and his involvement on that end of things also speaks to the current state of affairs. In normal times, he said he would typically get 160 cases to handle per quarter, currently he said trustees are trying 40 cases per week. And unfortunately, with this influx, he said he has noticed some inferiority sidle in.

"The increase in volume has certainly not meant and increase in the quality of the work," he said. "I think way too many lawyers are getting caught up in volume and trying to turn them around quickly, sometimes at the expense of the quality of the work product, which is something I don’t like to see as a trustee."

Closer Review

One thing the new law will force is increased diligence. Bankruptcy lawyers will now need to sign a certification as to the accuracy of the bankruptcy schedules they’ve filed and if it can be proved they didn’t do their homework, they will be subject to sanctions.

Currently, people need documentation, mortgage notes, car loans and such to get a file going in a bankruptcy, but Lanser said some lawyers now give their clients leeway that won’t be legal come once the bankruptcy reform takes full effect.

"Some bankruptcy lawyers simply trust their clients to give them certain information rather than the lawyer reviewing those documents themselves," he said.

However, the way the law is written, it seems like attorneys must take things a couple steps further, according to Chief U.S. Bankruptcy Judge for the Eastern District of Wisconsin, Margaret Dee McGarity.

"I don’t know what standards we’ll be held to. I don’t know if that means the attorney has to go out to the debtor’s house and check for Aubusson carpets and Louis the XV commodes, but they don’t and they won’t and it’s impossible," she said. "I hope it won’t be an impossible standard, but it’s the sense of Congress that attorneys investigate their own clients."

McGarity compared the situation to telling a criminal attorney they must investigate their client to find whether there’s fault before pleading them not guilty. That certainly won’t ever happen and she predicted this particular provision might prompt some lawyers to stop practicing bankruptcy law.

"It may chase out some of the attorneys in the profession who don’t want to have to deal with that," she said. "It’s going to take years for that sort of standard to be tested and a body of law to develop and that’s expensive, time consuming and gut wrenching to all concerned."

Insurance Costs

And this extra leg work is also bound to beef up the bottom line in preparing bankruptcies and also in attorney overhead, says Christine Wolk, chair of the State Bar of Wisconsin’s Bankruptcy Section.

"That’s going to make our malpractice insurance go up, which is going to increase the cost of bankruptcies," she said. "I think it’s a conclusion everyone is drawing, that’s the first battle cry you hear, ‘Oh my God, my malpractice insurance premiums!’ because we have more potential liability. The insurance company will use this as an excuse because we can’t possibly know in the first year that we’re going to have claims."

On the other hand, one enterprising Madison attorney is using the new laws to create a special niche for herself. Victoria Hewelt Cazel plans to offer both her clients and other attorneys investigative services that will satisfy what the government will require a debtor to produce. She already announces on her Web site what must accompany a filing, namely:

• Four years worth of IRS transcripts;

• Two sets of correspondence from the creditors with correct
  addresses;

• At least one year of bank statements, credit card statements, loan statements;

• At least 6 months of pay stubs from all employers;

• Home and vehicle appraisals;

• A comprehensive list of personal property;

• A year’s worth of utility bills.

She has lined up a vehicle appraiser who will work in the Madison area for now and they are honing in on house appraisers. She plans to charge $200 to $400 for this service, depending on what all is involved in a particular bankruptcy.

"We’ll be doing some other things, like videotaping their personal property, something that lawyers I’m assuming would rather have someone else do, rather than take their camera out to a house and videotape," she said.

She said she could possibly develop this into a statewide enterprise but she’ll have to wait and see how it takes off first.

All these documents are part of another mean morsel in the new law, which is the required "Means Test" for measuring whether or not someone is eligible for a Chapter 7 filing. Under the old code, the trustee would study schedules, both income and expenses, to determine whether a person could reasonably afford to extinguish their debt through Chapter 13.

The new measure is immutable. The test is based on Internal Revenue Service and U.S. Census Bureau cost-of-living statistics. If a client’s figures don’t fit, they can’t file for Chapter 7. Instead, they will face a Chapter 13.

So what bodes for the future? McGarity and Lanser suggested the same thought — that some attorneys might bow out of the bankruptcy game altogether. Those who stay in the game will have more work and it will be a more expensive field of practice.

Benefits of Change

So what purpose did this exercise serve?

Seventh Circuit Court of Appeals Judge Richard Posner, in a March 27 posting on his Web log (www.becker-posner-blog.com) indicated the law will benefit every consumer.

"I conclude that the new Act, by increasing the rights of creditors in bankruptcy (for remember that Chapter 13 enables a creditor to obtain repayment out of the debtor’s post-bankruptcy income, not just out of what may be his very limited nonexempt assets at the time of bankruptcy, as under Chapter 7), should reduce interest rates and thus make borrowers better off," wrote Posner. "The most reckless borrowers — those most prone to file repeated Chapter 7 bankruptcies — will be made worse off. But there will be fewer of these, precisely because they will be worse off than under the existing system. If bankruptcy is more costly, there will be less of it."

Wisconsin bankruptcy experts challenged the notion that credit card companies will respond in kind by reducing interest rates.

"I think that’s one of the dangers of relying heavily on economic analysis of that kind, because it predicts outcomes in sort of a facile way, which really I think people closer to the events would predict things would come out the opposite," said Chief U.S. Bankruptcy Judge for the Western District of Wisconsin, Robert Martin. "I’m not questioning the care with which Judge Posner undertook his analysis, but I think the lack of genuine familiarity with the area might cause him to believe things might operate in a way different from what we’re most likely to see. Quite a bit of law economic analysis is a little soft and fuzzy."

As for procedural positioning to handle the new rules and regs, Christopher Austin, clerk of the Eastern District of Wisconsin Bankruptcy Court, says it’s too soon to tell how exactly the new laws will effect how his office operates, but they are reviewing the regulations and probably some new rules and procedures are required. For instance, he says they have a new duty to notify a debtor if they "are likely to flunk the means test" — and the notification must be sent within 10 days of filing — and they are looking at the best practices for performing this procedure.

In practical and legal matters, the judges say their Chapter 13 dockets will surely soar, there will be many more motions, including those to dismiss, but they both agree their part in this whole scenario will be relatively minor.

"The lawyers are going to teach me this law, not the other way around. They are going to become conversant in it by necessity in a way that I won’t, at least at first," Martin said. "That’s one of the real difficulties right now it there is a pretty steep learning curve and there is relatively little time to actually engage in the learning. I would not have the temerity to give advice to lawyers at this point. I wouldn’t trade jobs with them either."