Attorneys say new bankruptcy law ineffective
Consumer bankruptcy lawyers survey finds most potential bankruptcy filers can't afford to pay even a portion of their debts.
NEW YORK (CNN/Money) – Ninety-seven percent of consumers seeking to file for bankruptcy so far this year cannot afford to pay back their debts, according to a survey by the National Association of Consumer Bankruptcy Attorneys (NACBA).
NACBA surveyed six credit counseling agencies that have been working with over 61,000 potential bankruptcy filers and assessing their ability to pay what they owe under a debt management plan.
Going for credit counseling within six months of filing for bankruptcy is a new requirement for debtors seeking bankruptcy relief under a reform law that went into effect in October.
The reform law was intended in part to prevent consumers from abusing the bankruptcy system by clearing all their debts when they might have the ability to repay at least some of them.
Critics of the law contend that it is overly broad – imposing greater costs and obstacles to filing on everyone in order to ferret out a small number debtors who have the means to pay off at least some of what they owe.
That the NACBA survey found that only 3 percent of potential filers have the means to pay back some of their debts didn't surprise Sam Gerdano, executive director of the American Bankruptcy Institute (ABI).
In 1998, when bankruptcy reform legislation was first proposed, the ABI conducted a study of how many filers could afford to pay something and found that only between 3 percent and 3.5 percent could.
The NACBA survey also found that 79 percent of potential filers said their financial troubles were the result of circumstances beyond their control – e.g., a medical crisis or job loss.
"(T)he credit counseling requirement under the new law, designed to steer debtors who could repay their debts into a debt management plan, simply imposes new costs and time burdens on individuals who can ill afford either – and clearly are not the people for whom a DMP is feasible," the NACBA report states.
Bankruptcy filings year-to-date are down 74 percent from the same period last year, according to data from Lundquist Consulting, Inc. Filings hit an all-time high this past fall just ahead of the new law going into effect.
Brad Botes, NACBA's executive director, said the filings may be down because some consumers falsely believe bankruptcy is not an option for them because of the more stringent law.
It's impossible to tell, however, who simply is not coming forward because they mistakenly think they won't be allowed to file for bankruptcy or feel they can't afford the increased costs of filing or those who are not filing because they can pay some of their debts and likely wouldn't be allowed to clear their debts under what's known as a "fresh start" – or Chapter 7 -- bankruptcy.
During January of this year, the percentage of people filing for Chapter 7 fell while those filing for Chapter 13 bankruptcy – under which you must pay a portion of your debts over five years -- rose considerably from the levels seen in January 2005, according to Lundquist.