Sweeping bankruptcy bill sails through Congress

St. Louis Daily Record & St. Louis Countian, Mar 29, 2005 by Reni Gertner

(This article originally ran in Lawyers Weekly USA, Boston, MA, another Dolan Media publication).

A sweeping consumer bankruptcy bill that would make it more difficult for debtors to file for bankruptcy is sailing through Congress and is expected to be signed into law within the next month, experts tell Lawyers Weekly USA.

The bill has been debated in Congress for nearly a decade and derailed at the 11th hour every year. But this time, sources agree that the legislation is virtually certain to become law.

Sam Gerdano, executive director of the American Bankruptcy Institute in Arlington, Va., said that while events in the past have conspired against the bill's enactment, this year the stars have apparently lined up right for the proponents.

John Rao, an attorney with the National Consumer Law Center in Boston, agreed. All of the things that occurred in the past that blocked it at the last minute just really aren't there right now, he said. And David Goch, a lobbyist with the Commercial Law League of America in Washington, who has followed the bill closely, said, Passage is a 90 percent certainty.

Among other things, the measure would force more debtors out of Chapter 7 and into Chapter 13, make more debts nondischargeable and subject debtors' attorneys to sanctions if they fail to verify the accuracy of debtors' bankruptcy petitions.

The bill has passed the Senate and been approved by the House Judiciary Committee. At press time, the House was expected to reconvene for debate on the measure the week of April 5 and pass it quickly. President Bush has stated he intends to sign the bill into law.

The bulk of the bill's provisions would go into effect six months after enactment - and bankruptcy attorneys said they are already hearing from clients who want to consider filing before then.

According to James Caher, a debtors' lawyer in Eugene, Ore., The phone has been ringing. Caher said he's been keeping track of the potential clients who have come in over the past six months, and I'll be sending letters to say if they haven't solved their problems, they might want to discuss filing because the new bill is bad, and [most people] should file before it goes into effect.

Dianne C. Kerns, a Chapter 13 trustee in Tucson, Ariz., also expects a short-term increase in filings. There is no question if the law is enacted and has a 180-day delay in becoming effective, that there will be an enormous surge in filings, she said.

Gerdano said this could mean approximately 100,000 extra cases being filed between April - when the bill is likely to be signed - and October.

And the homestead exemption limits, which would go into effect as soon as the bill is signed, might speed up the rush to file even more in states that currently have big exemptions.

That's the biggest thing people need to watch out for immediately, said Philadelphia attorney Henry Sommer, current president of the National Association of Consumer Bankruptcy Attorneys.

In general, experts expect the new measure will make it much harder for attorneys to represent debtors. I think lawyers are going to be representing fewer people and charging more, said Sommer.

Elizabeth Warren, a bankruptcy professor at Harvard Law School, agreed. I think this bill is deliberately designed to raise costs for people filing bankruptcy, and a big part of that increase in costs will be lawyers' fees, she said.

Sommer said the bill is likely to cause some lawyers - especially general practitioners - to abandon bankruptcy practice altogether.

This is really going to drive the general practitioner out of the practice because it will be so much more complicated, with so many more forms and restrictions, he said.

The complexity of the new provisions is also likely to lead to more litigation. Absolutely there is going to be litigation and unintended consequences, said Goch. Anyone who disagrees is kidding themselves. Gerdano agreed.

We are still identifying traps for the unwary, he said. There are all kinds of ambiguities, and the litigation shakeout will take years. The bill will also make practice more difficult for trustees, said Kerns.

Trustees will have to do a lot of extra work, including notifying collection agencies about any money that's owed [related] to the bankruptcy, something that will be difficult to determine, she said.

Here's a look at the key provisions of the bill:

* Chapter 7 is limited. Under the bill, a Chapter 7 filing would be considered abusive, and there would be a presumption that the debtor should file under Chapter 13 if - in a five-year plan - he or she could pay the lesser of (a) 25 percent of unsecured claims or $6,000 of unsecured nonpriority claims, whichever is greater, or (b) $10,000.

The presumption under this means test could be rebutted only if the debtor could demonstrate special circumstances.

The determination of how much a debtor could pay would be based on IRS guidelines for reasonable and necessary expenses. The bill excludes Social Security payments from the calculation of current monthly income for the purposes of the means test. It also specifies that reasonable expenses should include funds needed to protect the debtor's family from domestic violence, actual expenses incurred in caring for elderly or disabled family members and private or public school tuition of up to $1,500 per year. Under the bill's safe harbor exemption, the means test doesn't apply to a debtor whose income is equal to or below the highest median family income for a family of equal or lesser size in the applicable state.