|Gerri Willis offers the top five tips on filing for bankruptcy before the new law goes into effect. (October 7)|
NEW YORK (CNN/Money) – Bankruptcy filings in the past few weeks have spiked to record highs as consumers rushed to file before a new, more stringent bankruptcy law takes effect on Monday, Oct. 17.
For the week ending Oct. 8, bankruptcy courts reported a total of 102,863 filings, up from the previous record high of 68,387 the week before, according to data from Lundquist Consulting. Year-to-date, the number of filings has grown 19.4 percent compared with the same period in 2004.
Based on preliminary data, Lundquist researchers are expecting to see more than 200,000 personal bankruptcy filings for for the week ending Oct. 15, said Jane Truch, senior manager of research and analytics at Lundquist.
On a daily basis, the increase has been dramatic. There were more than 20,000 filings per day on average in the week ending Oct. 8, up 54 percent from the week before, and almost triple the number of daily filings in August.
That has meant a heavy caseload for bankruptcy attorneys, and a crush of filings in bankruptcy courts.
"The ones in my practice tell me they're absolutely buried," said John Penn, president of the American Bankruptcy Institute and a partner in the Texas firm of Haynes and Boone.
Many bankruptcy courts have sent notices to attorneys in the past week telling them that they expect to be swamped and so advise filers not to wait until the last-minute on Sunday if they plan to file electronically, which is common -- or to the end of day Friday if they're filing in person, said Maureen Thompson, executive director of the National Association of Consumer Bankrutpcy Attorneys.
Thompson's also been getting reports that there have been lines around the block of debtors representing themselves as well as of attorneys with boxes of paper filings at some bankruptcy courts. And the "Miami Herald" on Friday reported that the bankruptcy clerk's office in Miami is planning to open for three hours on Sunday to accommodate the rush of late filers.
Starting Oct. 17, it will be harder for individuals to file for bankruptcy under Chapter 7, which would let them clear their debts and get what's known as a "fresh start." The law makes it more likely that they must file under Chapter 13, which requires debtors to repay at least some of their debts within five years. It's fair to assume that the rush of late filers in the past few weeks are mostly those who would like to file for Chapter 7, Thompson said.
Among them are a lot of people who – but for the new law -- might otherwise have filed later in the year, even though many of their cases wouldn't come close to "tripping" the means test required under the new law, Penn said.
That means test is intended, among other things, to assess whether debtors have enough money to repay some or all of their debts.
The test is based on a formula that takes into account a number of factors, including one's average income over the past six months, the median income of the state in which a consumer files, and the debtor's expenses.
Penn estimates that only between 5 percent and 10 percent of consumers filing for Chapter 7 will trip the means test, and risk being pushed into Chapter 13 or having their case dismissed entirely.
Consumer advocates have complained that the means test is too inflexible, citing as one example the fact that cost-of-living standards derived by the IRS will be used to determine whether a consumer's costs for housing, food and other expenses are reasonable.
The new law also requires more documentation from filers, including pay stubs and tax returns. It imposes greater liability on bankruptcy attorneys. And it will require more time on the part of filers, attorneys and the courts.
Consequently, attorneys' fees are expected to soar. Penn said that currently a consumer might pay between $1,500 and $3,500 to file for bankruptcy. Chapter 13 filings are on the higher end of that range, because they take more time than filing for Chapter 7.
But as a result of the greater work required under the new law, and the increase in attorney liability, Penn has heard from attorneys that they may increase their fees by between 75 percent and 100 percent.
"Special circumstances" guidance
The new law lets debtors try to make the case that theirs are "special circumstances" in which a crisis beyond their control forced the bankruptcy filing. If the court agrees, the debtor is more likely to be allowed to declare a Chapter 7 bankruptcy, even if he doesn't technically qualify for it as a result of the means test.
Opponents of the law have complained that the courts will have less latitude than they do currently to allow a debtor to clear his debts in consideration of those special circumstances.
They've also called on Congress to pass a law exempting Katrina survivors from the new law for one year and instead allow them to file for bankruptcy under the current law. Some bills have been proposed, but may not get anywhere, Penn said, because objections could be raised on constitutional grounds that there would not be a uniform federal bankruptcy law in effect across the country.
Meanwhile, the U.S. Trustee, which administers the bankruptcy process and enforces bankruptcy laws under the Department of Justice, said last week that it considers the circumstances of Katrina survivors as "special circumstances" and will be exempt from credit counseling requirements under the new law. That should make it more likely that Katrina survivors filing for bankruptcy will be allowed a fresh start under Chapter 7.
To learn more about the changes ushered in by the new bankruptcy law, click here.