The New Bankruptcy Reform Law: Separating Fact from Fiction
By David Cox, Published in the News & Advance, October 2005
Consumer bankruptcy lawyers across the region have been busy for the last several weeks fielding calls from and meeting with anxious clients hoping to file for bankruptcy relief before the implementation of the new federal bankruptcy reform law. With the combination of such extensive media attention and a very complex change in the law that affects so many individuals and families living on the edge of financial insecurity, rumor and misinformation about the law has been widespread. This has lead to an unprecedented spike in last-minute, panicked bankruptcy filings. The Roanoke, Virginia bankruptcy clerk’s office reported that a record-breaking 813 petitions were filed in the western half of the state, including Lynchburg and surrounding counties, in one single day before the law changed in mid-October. By comparison, just over 4800 petitions were filed in all of 2004.Now that the dust has settled and the new law is firmly in place, was the frantic rush to file necessary? While it is safe to say that many of the details of the new law will need to be sorted out by the courts in the coming months and years, the fundamental framework and protections of our bankruptcy system have not disappeared. It may be helpful, though, to separate fact from fiction with respect to the new law.The following are some of the more common “myths” I have collected from clients over the last few weeks.
MYTH #1: You cannot file for bankruptcy after October!
This, of course, is wrong. In fact, most all of the same bankruptcy protections available to clients under the former law are still available under the new law. The source of this rumor is not clear but it may have sprung from the fact that some, very high-income individuals may have more trouble filing a Chapter 7 and walking away from their debts due to a bright line “means test” under the new law. However, even if an individual exceeded the income limitations for a Chapter 7, they would still have other effective bankruptcy options for dealing with their debts, such as under a Chapter 13 repayment plan where debt can often be wiped out over time for just a small fraction of what is owed.
MYTH #2: Medical bills and credit cards cannot be wiped out under the new law!
Medical bills and credit cards will continue to be the most common types of debt discharged by all types of bankruptcy under the bankruptcy reform law. There are no limitations on the amount or type of medical bills or credit cards that a client may include in his or her bankruptcy. As under the prior law, though, recent cash advances and luxury credit card purchases incurred on the eve of filing will remain problematic for clients trying to discharge those debts under the new law.
MYTH #3: You cannot file for bankruptcy relief under the new law if you own your own home or own more than one car!
The new law does not contain any restrictions about the number of homes or cars you may own before you may file. The real issue is whether any of those assets will be lost in a Chapter 7 proceeding because its value or “equity” may be beyond the amount that our state laws allow you to exempt and protect from creditors. It is true that Virginia’s exemption laws are some of the stingiest in the country, but these have not changed in any way under the new bankruptcy reform law. Just as under the old law, Chapter 13 under the new law will remain an attractive option for clients that do not want to lose any property in their bankruptcy.
MYTH #4: You can no longer reduce car payments or stop home foreclosures!
Although Congress did succeed in making it more difficult to reduce a client’s secured debt payments, such as car loans, they may still be adjusted and restructured to make them more affordable. Also, one of the most powerful aspects of the bankruptcy process has been the ability to stop a foreclosure and allow a person to catch up their missed mortgage payments over time if they have fallen behind. This extraordinary power remains unchanged.
Of course, not everything about the new law is the same as under the former law.
TRUTH #1: Filing bankruptcy under the new law will be more complicated and time-consuming.
Bankruptcy will require a bit more advance planning on the part of clients and lawyers going forward. Congress’s new law does impose a multitude of paperwork requirements and legal disclosures that must be provided to clients before they may file. Documentation and extensive proof of assets and their values will be must in every case as well. In addition, clients will not be able to file for bankruptcy without completing a credit counseling course and they will not receive a discharge of their debts until they undergo a separate debtor education course. These new requirements are made even more difficult because the overwhelming majority of credit counselors operating in the country today are not “approved” by the bankruptcy courts yet.
TRUTH #2: Filing bankruptcy will be more expensive.
Both the credit counseling and the mandatory debtor education course are new requirements and the clients will have to bear these expenses as a part of their bankruptcy. Currently the cost to satisfy both requirements ranges from $100 to $200 per case. Also, with the additional demands on the lawyers imposed by this new law, attorneys’ fees are expected to rise as well. Interestingly, though, while the court’s Chapter 7 filing fee increased by $65 under the new law, the Chapter 13 filing fee actually decreased by $5.
TRUTH #3: The new law is more complex and include potential pitfalls for the unwary.
The bankruptcy reform law is the product of heavy creditor lobbying and attempts to end all abuse of the system. While this may be a lofty goal, the end result is a very complicated piece of legislation with detailed tests and penalties that are triggered under certain specific factual scenarios. Individuals trying to represent themselves as well as inexperienced attorneys will find the law difficult to follow and unforgiving. Across the country many attorneys are giving up their practices in this area of the law, which may decrease the availability of competent bankruptcy lawyers to assist clients who wish to file for relief.Regardless of what Congress intended to happen when it reformed the bankruptcy laws, the truth is that bankruptcies will continue. Illness, unemployment, divorce, and financial mismanagement will continue to occur, and bankruptcy will continue to be an option of last resort for individuals and families. Many of the details of the new law may even be softened by the courts as they try to manage a system that is at its core, of course, designed to give people a fresh start. Only time will tell what the real impact of the legislation will be, but for now, little is expected to change.