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Survey indicates new law punishes debtors

The National Association of Consumer Bankruptcy Attorneys (NACBA) recently released a survey, entitled “Bankruptcy Reform’s Impact: Where are all the ‘Deadbeats’?”, that showed the bankruptcy reform act that took effect Oct. 17 isn’t doing what proponents purported it would, rather it’s punishing those people bankruptcy is supposed to protect.

A month ago NACBA invited 10 of the major credit counseling agencies to respond to a survey that was designed to gauge how well the reforms are reforming. The reforms were ostensibly supposed to help ferret out deadbeats who run up enormous bills on their credit cards and then attempt to have their debt erased through Chapter 7 bankruptcy. That’s what Congressman F. James Sensenbren-ner (R-Wis.), chairman of the U.S. House Judiciary Committee, was quoted saying.

“The need for bankruptcy reform is long-overdue and crucial to our nation’s economy and the well-being of our citizens. Every day that goes by without these reforms, more abuse and fraud goes undetected. Every abusive bankruptcy filing adversely affects hardworking Americans in the form of higher interest rates and increased costs for goods and services,” the study quoted Sensenbrenner. “America’s economy should not suffer any longer from the billions of dollars in losses associated with profligate and abusive bankruptcy filings.”

Survey Response

However, the survey — six credit counseling firms responded — showed that out of 61,335 consumers, almost 80 percent of the people were seeking bankruptcy protection due to circumstances beyond their control and slightly over three percent of those consumers would qualify for a debt management plan; the rest could only be saved by bankruptcy. The numbers by all accounts are on par in Wisconsin.

Despite what Congress seemed to think is going on in the trenches, Milwaukee attorney Penny Gentges, who represents secured creditors like banks and mortgage companies, says essentially that view is out of touch with the Wisconsin reality.

“I’ve been doing this work for 13 or 14 years now and I have to say I’ve probably seen in that time period five cases that would constitute abuse of the bankruptcy process and the courts have always dealt with those people handily,” she said. “The bankruptcy reforms don’t impact our practice that much, but I think it’s made the process more burdensome and more expensive for the consumer.”

What many say is that the bankruptcy reform act is working exactly the way Congress really intended. And it wasn’t meant to beat down deadbeat’s doors, says Milwaukee consumer debtor bankruptcy attorney Todd Esser.

“Congress has been very effective in taxing the constitutionally protected right to file bankruptcy.”

Todd Esser
Consumer Bankruptcy Attorney

“Congress has been very effective in taxing the constitutionally protected right to file bankruptcy,” Esser said. “Congress doesn’t like bankruptcy; they don’t like people filing bankruptcy so what do they do? They make it more expensive, they charge more at the court level, they make it a more complicated proceeding so that attorneys are required to charge more, and they add additional requirements so that it hurts.”

Filing Fees Rise

One additional challenge was a change in the cost for filing bankruptcy. The courts were ordered under the law to adjust bankruptcy filing fees as follows: Chapter 7 fees rose $65, Chapter 11 fees increased $200, and Chapter 13 filing fees dropped $5.

But that’s not the end of fee changes; a spokesperson in the Western District of Wisconsin Bankruptcy Court said they got a message in mid-February notifying them that the House and Senate have passed further fee increases that will take effect — if the president confirms — 60 days after the signing. Chapter 7 fees would jump from $274 to $299; Chapter 11 would more than double from $1,039 to $2,789; and Chapter 13s would soar from $189 to $274.

Esser said he too had to raise his rates to comport with the extra work the reforms have caused. He used to charge around $750 for a Chapter 7 case and now culls about $1,200 and Chapter 13s increased from $1,500 to $2,500.

“I know somebody can’t afford my fees before I quote them because I’ve just been through their whole financial disclosure with them,” Esser said. “Let me tell you, no one feels more awkward than me telling someone that our fees are what they are, when I know how difficult it will be for them to pay. We are looking for other ways to help them.”

These expenses are leading — both in the national findings and in Wisconsin — to people striking out pro se, which also leads to more dismissals because they don’t know the law.

Filing numbers in Wisconsin predictably dropped dramatically after the deadline; the stats from the Eastern District Bankruptcy Court showed 7,270 total filings in October alone and only 685 filings from November through January. Western District Bankruptcy Court filings dropped from 3,979 in October to a mere 123 through January. The Western District has also kept track of pro se filers since 2000, when 183 filed for themselves. That number has slowly grown until it exploded in 2005 when 445 people filed pro se and 40 percent of those filers came to court in October.

An Eastern District case report showed that of the 40 cases dismissed between Oct. 17, 2005, and March 2, 2006, more than half of the cases (25) were filed pro se. Several of those cases were dismissed because they lacked the paperwork required by the new law.

Dismissals are up in the Western District as well, according to Chief Judge Robert Martin, and part of that is because of the mandated pre-filing credit counseling certification.

“We’ll probably have to put up a big sign soon,” the judge said. “The consequences of dismissal have been increased by the Legislature. You may not be elig
ible to re-file or if you do you may not get a stay of creditors’ actions that much longer than a very brief time. The consequences of dismissal and the probabilities of dismissal are enormously greater for a requirement that has been only somewhat publicized. The pro se debtors don’t know about it and they don’t know how to do it.”

Credit Counseling

A large focus of the national study was the credit counseling component. Since the lion’s share of consumer bankruptcy filers get there because of exigent circumstances — job loss, mega medical bills — nearly everyone says it’s just mean to make people who haven’t shown a penchant for bad budgeting jump through these hoops. What’s more, even the credit counselors themselves say credit counseling isn’t for everyone. Not only is the situation virtually financially hopeless by the time someone decides to take the leap, but the mens rea isn’t conducive to a successful outcome, says Kathryn Crumpton, manager of Consumer Credit Counseling Services of Greater Milwaukee, one of the government approved agencies.

“It does work for people who do want to get out of debt, who feel a responsibility to do that,” she said. “Just because you make a law telling people they have to go to credit counseling first, before they can file a bankruptcy, I don’t think you can instill that value into people to pay off their debt.”

Many of the provisions of the bankruptcy reform bill are bothersome, not just the credit counseling criteria, but Bradford Botes, executive director of NACBA, said that’s as good as any place to start trying to get Congress to correct itself.

“With the amount of money the credit card companies put into this bill there are a lot of things in it that are hurting them. I think after some time passes, there will be calls from many different sides of this issue asking for reform,” Botes said. “The law is so poorly drafted. … It’s causing dramatically increased costs for all players in the field because we are trying to figure out what the heck this law means.”

Botes said one of the provisions inserted by the big auto lenders is cutting into the credit card company’s portion of the Chapter 13 pie which is causing them fits. Thus he believes tweaking might be forthcoming. A changing of the guard come November also could be cause for hope he said.

Too Soon to Tell

Rob Potrzebowski, Jr., managing partner for the Kohn Law Firm in Milwaukee, said it’s really too early to tell how the reforms are affecting his clients — the credit card companies. Currently in the Eastern District there are 1,189 open Chapter 7 and 13 cases in various stages of completion and 647 cases are pending in the Western District. So the bulk of cases filed after the new law took effect haven’t reached an adversarial stage yet.

Potrzebowski said the credit card companies were most concerned with getting a meaningful means test in place so that able-earning people — who might have a slight pitfall in life — can’t dismiss their debts forever. The credit card companies didn’t get their “pie-in-the-sky” dream provision in that regard.

All sides of this issue have criticized the current means language and Potrzebowski said once again it’s too soon to tell the effect of the laws.

Laura Fisher, a spokesperson for the American Bankers Association, said the numbers NACBA and the credit counselors churned out are what they had expected. One of NACBA’s goals was to make sure people realize the bankruptcy system is still alive and well and Fisher reiterated that sentiment.

“There are still people filing and I think the credit counseling is $50 and the fees have gone up slightly and the lawyer’s fees have gone up, but when you look at the amount of relief that people get, I still think it’s a pretty good deal,” she said. “People can wipe out thousands of dollars of debt.”

Contrary to what Botes contends however, she said she doesn’t think tweaking of the reforms — other than the technical changes currently in the works — will be necessary.

Comprehensive Improvements?

Related Links

National Association of Consumer Bankruptcy Attorneys

Wisconsin Law Journal asked Terry Shawn, press secretary for Sensenbrenner’s House Judiciary Committee, whether Congress might reconsider some of the reform act. Questions pertaining to criticisms of Congress in this regard were also posed.

“The Bankruptcy Abuse Prevention and Consumer Protection Act represents comprehensive improvements and is the result of eight years of intense Congressional consideration. In the House, the Judiciary Committee held 18 hearings at which nearly 130 witnesses representing nearly every major constituency in the bankruptcy community, including the National Association of Consumer Bankruptcy Attorneys, testified,” Shawn wrote. “Support for bankruptcy reform was overwhelmingly bipartisan and bicameral. The U.S. House of Representatives passed bankruptcy reform on nine separate occasions. The final piece of reform legislation passed in the House by a 302 to 126 margin and in the Senate with a vote of 74 to 25.”

Eastern District Bankruptcy Chief Judge Margaret Dee McGarity said that when the reforms were under consideration, any opposition going up against the credit card companies was merely “a cry in the wilderness.” And she said unfortunately voices raised in Washington can’t possibly pose the true picture.

“I thi
nk anyone who went and sat through 341 meetings of creditors and listened to what happened to people and looked at their schedules and talked to them, nobody who ever did that would make these kinds of statements,” she said of Sensenbrenner’s comments. “These are people who are completely at the end of their tether. I don’t know where these comments came from. What is coming up now as a result of this law is exactly what we predicted and expected and lobbied against … obviously our opinions didn’t matter.”

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