Bankruptcy courts flooded with filings

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When the new bankruptcy reforms hit, the term “the sky is falling” quickly came to mind. Now that the deadline for filing under the old rules has passed, the legal community is finding loopholes to allow them to help clients.

The two Wisconsin bankruptcy courts were deluged in the final two weeks before Oct. 17 — the day the Bankruptcy Reform Act took effect — with a phenomenal 11,055 new filings. Bankruptcy Court Clerk Christopher Austin said that with some paper files still to input it looks like approximately 7,100 new bankruptcy petitions were filed in the Eastern District of Wisconsin during the first two weeks of October. About 5,400 of those came in the final week before the new bankruptcy rules took effect.

On the other side of the state, the Western District bankruptcy court took in 3,955 filings — that’s all chapters, but the vast majority was Chapter 7. On Oct. 14, alone, 800 cases were filed, said Western District Bankruptcy Court Clerk Marcia Anderson. In the week following the deadline only 19 new filings appeared at her door.

“It’s been pretty quiet here; we’re kind of like the Maytag repair people,” she said. “We’re here if they want to file and we’re a little lonely.”

They might be lonely, but they are certainly not twiddling their thumbs; now that the cases are filed, they have to be dealt with and that’s no mean feat.

Austin said at this point they have had to ask the U.S. Trustee for additional calendars to handle the caseload and they have stepped into next year to accomplish this feat.

“(Assistant U.S. Trustee) David Asbach has, under the rules, the ability to schedule out 60 days in areas were he is not regularly staffed. There are some circumstances that are anticipated under the rules,” Austin said. “I don’t think the rules anticipate what we have now, but as a practical matter he’s had to give us calendars that far out.”

New Rules

Anderson and Austin are confident their offices can handle the mountain of new filings. What seems more compelling is how people plan to handle the various obligations and restrictions Congress set forth in the 500-page Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 that was signed into law in April. Initially, the bankruptcy legal community sent out a collective hue and cry criticizing the legislation as punitive, complicated and doom and gloom was universally predicted.

Ironically, as bankruptcy lawyers have had time to peruse the papers they are wringing their hands less tightly. It’s not that they loathe the new law any less; they say when you have lobbyists rather than lawyers drafting legislation the framework can be flimsy. Therefore, said Madison attorney J. David Krekeler, there are lots of loopholes.

“That’s what we do as lawyers; we come up with creative ways to accomplish whatever we’re seeking to accomplish,” Krekeler said. “It’s a lousy law, but I don’t think it’s the doom and gloom that was predicted and I view it as a challenge. We will find creative ways to help people despite what the law may say.”

For example, he said if he has a client with a hefty mortgage built out over 30 years, he’ll advise him to refinance to a balloon prior to filing a Chapter 7 petition, so he can take advantage of the larger immediate obligation. Then once the bankruptcy is binding, his client can go back and return his debt to the longer obligation again. It’s all perfectly legal and it just makes use of rigid means test guidelines.

Lawyer Liability

Lawyers were also extremely concerned about the nugget in the law that puts the onus on attorneys for the credibility of their client’s information. Some were thinking they’d have to don a video camera and canvass the client’s belongings to assure an accurate accounting of assets.

Daniel R. Freund, an Eau Claire attorney, says the provision — as written — is paltry.

“I don’t read it as requiring what some people say it requires. The actual text is reasonable inquiry — it doesn’t say of whom — so if your reasonable inquiry is of the debtor that is sufficient, you don’t have to make an independent inquiry of third parties,” Freund said.

“So all I’m doing is redoubling my pretty intense efforts to make sure my clients understand it’s important they list all of their debts, list all of their assets and tell the truth.”

Plus, both Freund and Krekeler observed that the Wisconsin bankruptcy judges are just and reasonable. Western District Chief Bankruptcy Judge Robert Martin returned the compliment.

“None of the judges I know have any zealousness about making lawyers more responsible than they always have been,” Martin said. “I think we’ve held pretty high standards and they’ve always met them. I think our bar has made it so that there is no anticipation there will be a problem.”

However, there are some sections that do significantly concern the crowd. Congress has reclassified bankruptcy attorneys — and arguably any attorney who advises clients in areas that touch the bankruptcy arena — as &#
147;Debt Relief Agencies” and imposed strict rules and regulations, some of which many find unconstitutional.

For example, debt advisors are prohibited from counseling their clients to borrow money in anticipation of filing bankruptcy.

Milwaukee attorney Leonard Lever-son, chair of the State Bar’s Bankruptcy Section, said while no ethical attorney would tell a client to jack up their credit card debt, it makes sense to tell someone to borrow money from a family member, or take out a home equity loan — which will be eventually re-paid — to finance the filing and handling of the bankruptcy.

“This law makes it illegal for a lawyer to give advice to their client that may be in their client’s best interest and could be good legal advice and entirely legal to do,” Leverson said. “The National Association of Consumer Bankruptcy Attorneys is looking at that, but I don’t know that our State Bar will be acting on that.”

Actions Already Taken

One jurist, Chief Bankruptcy Court Judge Lamar W. Davis, Jr., of the Southern District Court of Georgia, issued an order, which many find questionable since his finding wasn’t founded on any contested facts. On Oct. 17, Davis found that attorneys are not subject to the Debt Relief Agency requirements because they are regulated by the bar.

Martin said scuttlebutt indicates some lawyers are looking for ways to get a similar question, with a real case that would challenge the Debt Relief Agency directives as they apply to lawyers, before Wisconsin’s bankruptcy courts.

Another punitive provision pertaining to Debt Relief Agencies is the fact that lawyers, if they violate even the smallest detail of the required contract they must now give clients, will be on the hook for all costs in bankruptcy.

In addition to all the extra work now required, Leverson said that is part of the reason some attorneys have doubled their fees. While that’s their prerogative, the courts were ordered under the law to adjust bankruptcy filing fees. Chapter 7 fees jumped $65, Chapter 11 fees rose $200 and Chapter 13 filing fees dropped $5.
Purpose Perplexing

Oshkosh attorney Paul G. Swanson said it’s a bit odd that the stated purpose of the law was to encourage the use of the Chapter 13 tool — where creditors cull cash repayment — since that vehicle also took a hit.

“They have hurt Chapter 13 a lot. If you really look at the law, they’ve striped out a lot of the advantages; there’s no golden discharge or super discharge anymore,” Swanson said. “They have just de-incentivized Chapter 13 which is a shame — a terrible shame — and it is probably contrary to the stated intention.”

In the end, says Eastern District Bankruptcy Judge Margaret Dee Mc-Garity, this lopsided piece of legislation will truly hurt the little guy. Will those debtors muster up the money and energy to even contest cruel results of the law, she asked, so that she and her brethren on the bench will be able to interpret the new law?

“It’s just so confusing,” McGarity said. “And confusing in the legal sense means litigation and expense. The problems and uncertainties in the law are going to be worked out at the expense of the people who need to be served by the bankruptcy system, both debtors and creditors, the most. It’s just going to be extremely expensive and, as far as most of us can tell, to very little benefit.”

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David Ziemer can be reached by email.