Bankruptcy law not as bad as predicted
The most dire predictions haven't come to pass. Consumers are still filing for "fresh starts." But doing so costs more and takes more time.
NEW YORK (CNNMoney.com) -- When the new bankruptcy reform law went into effect a year ago, there was no shortage of nightmare predictions.
Consumer advocates and bankruptcy attorneys predicted it would make filing more onerous, force people to repay more of their debts even if they couldn't afford to, and discourage consumers from pursuing bankruptcy altogether.
Travis Plunkett, the legislative director of the Consumer Federation of America, predicted, "The new bankruptcy law will keep many Americans who need a fresh financial start in bankruptcy from receiving it."
Critics also said the credit card companies -- strong proponents of the legislation -- would make out like bandits.
Plunkett and bankruptcy experts say it's too early to assess with certainty the full effects of the new law, in part because lawyers and the courts are still figuing out how to use the law and because the number of filings this year is abnormally low given the record number of people last fall who filed before the new law went into effect.
But preliminary reports indicate that those who are in dire straits still qualify for Chapter 7, and auto lenders, not credit card companies, are benefiting most from the bill. As for costs and hassles, however, both are up.
Here's a more in-depth look at how three predictions have played out so far.
Prediction: It will be harder to file for Chapter 7
Reality: For some, yes
Many expected the law would make it much harder for people to file for Chapter 7 bankruptcy and push more of them into Chapter 13 -- which under the old law meant filers had to repay a bigger portion of their debt.
In a Chapter 7 bankruptcy, your assets (minus those exempted by your state) are liquidated and given to creditors, and many of your remaining debts are cancelled, giving you what's known as a "fresh start."
Filers who are unemployed, deep in debt and truly hard up are very likely to qualify for Chapter 7 under the new law, according to California-based bankruptcy attorney Stephen Elias, author of the "The New Bankruptcy: Will It Work for You?" published by NOLO.
But filing for Chapter 7 may become harder for others simply because there is now a two-part, formula-based eligibility test that must be passed, whereas before there was none.
Essentially, "you didn't have to qualify under the old law," Elias said, noting that eligibility for Chapter 7 used to be left to the judge's discretion.
There are some very preliminary indications that more filers are being pushed into Chapter 13 -- in which you must repay a portion of your debts over five years -- because they can't pass the means test.
Over 31 percent of bankruptcy attorneys say they're seeing somewhat of an increase (27%) or a major increase (4.5%) in clients who are forced into filing for Chapter 13 as a result of the new qualifiying test, according to a survey by the National Association of Consumer Bankruptcy Attorneys (NACBA)
In years past, typically more than two-thirds of all personal bankruptcy filings were Chapter 7. This year, Chapter 7 filings still make up the majority, but they fell to 59 percent of all filings in the first half of this year from 76 percent in the same period a year earlier, according to the American Bankruptcy Institute.
John Penn, ABI's immediate past president and an attorney with Haynes and Boone in Texas, predicts eventually there will be an even split between Chapter 7 and 13 filings.
Prediction: Filing will be more onerous and costly
In the NACBA survey, 81 percent said there has been a major increase in the time it takes to prepare a bankruptcy filing and 93 percent said the increased paperwork mostly increased the costs of a case rather than improved the results.
As a result, bankruptcy attorneys have pushed their fees up by as much as 100 percent.
Plus, a consumer's basic costs of filing minus attorney fees have almost doubled, in part because of the new requirement that filers attend and pay for credit counseling and money management classes, said Ike Shulman, a NACBA board member and a bankruptcy attorney in San Jose, Calif.
End result: A bankruptcy filing that used to cost anywhere between $500 and $1,500 on average might now cost between $1,000 to $3,500, said Elias.
But once attorneys become more familiar with the law -- and more efficient in handling all the new procedures -- Elias predicts their fees eventually may come down, at least for those clients who have clear-cut cases.
For consumers who can't afford an attorney and attempt to file on their own, there is greater likelihood that their case will be dismissed. That's because the new law imposes more rigid procedural rules and imposes a one-strike-and-you're-out threshold for automatic dismissal.
For instance, your case will be dismissed automatically if you don't provide by a certain date all your wage stubs for the 60 days prior to filing, Elias said.
Prediction: The credit card companies will make out like bandits
Reality: Not in bankruptcy court
Credit card companies lobbied for bankruptcy reform so that filers who could pay some of their debts were pushed toward Chapter 13, where they were likely to be forced to repay at least some of their unsecured debt, such as credit card debt.
But Elias and others are finding is that the new formula used to determine how much disposable income a filer has to pay that unsecured debt has been made more liberal in favor of the filer than it was originally.
That is, a consumer may end up owing nothing to the credit card company after all his priority and secured debts are accounted for and he has subtracted out all the allowable deductions from his income.
In addition to a more liberal formula in favor of filers, auto lenders -- another big proponent of the bill -- got a provision that allows them to pocket what otherwise might be disposable income, Shulman said.
Say a debtor has a $20,000 car loan but his car is only worth $15,000. Under the old law, he would have been ordered to pay back the car's value ($15,000) to the auto lender and pay the remaining part of the loan ($5,000) to his unsecured creditors, such as a credit card provider. But under the new law, he will have to repay the full $20,000 to the auto lender.
That doesn't mean credit card companies' victory in getting the bankruptcy law passed was just a Pyrrhic one, consumer advocates say. To the extent that consumers are convinced the new bankruptcy law is harsher than the old one, they may be reluctant to file or delay filing. And that delay means extra months of debt payments to credit card providers.