New Bankruptcy Reform
The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 will become law on October 17 In the face of rising bankruptcy filings. Although bankruptcy filings 2.6% for the first quarter of this year, they rose 12% in the second quarter compared to the same period in 2004 according to LexisNexis.
The Act’s new certification requirements and restrictive debtor-means tests, means some attorneys are considering not taking these specialized cases after it goes into effect. Even now, consumers may have trouble finding an attorney for their case.
“I would say that we’re going to see a lot more ‘per se’ cases—people filing on their own because of the difficulty they’re going to have in finding attorneys to handle (their cases),” says Phil Bolton, a certified bankruptcy attorney practicing in the Greensboro, North Carolina area speaking with the Business Journal of the Greater Triad Area. “There are a lot of very specific things that lawyers who do just a little of this would find hard to handle.”
At issue is a detail of the new law that will potentially dissuade bankruptcy attorneys from “pro bono” or reduced fee work. By law, they will be required to personally assure the accuracy of information contained the petition they will be filing on behalf of a client.
“There are a lot of traps for the unwary in walking through the means test process that put the attorney under significant scrutiny,” Jeff Oleynik, an attorney and partner at Brooks Pierce McLendon Humphry & Leonard in Greensboro, North Carolina told the Business Journal of the Greater Triad Area. “You add it all up and many will say ‘I used to do that pro bono for good reason, but it’s too risky any more.”
The new restrictive Chapter 7 means test will determine a debtor’s ability or inability to repay their debts. Under the new law, debtors who could take responsibility for a portion of their debts, would have to file Chapter 13 petitions instead of Chapter 7 petitions. The Collection Financial Standards used by the IRS will be used to determine income deductions for living expenses in both the Chapter 7 means test and the Chapter 13 disposable income test.
In petitions filed under Chapter 7, unsecured debt owed to lenders such as credit card companies is wiped out. A Chapter 13 petition sets up a five-year creditor repayment plan instead. Filers will also need to provide more information to creditors. Businesses filing Chapter 11 petitions will be affected by the new law also.
“It certainly doesn’t do anything that makes it easier or greatly facilitates filing under Chapter 11, but by the same token, a number of new requirements have actually already been incorporated into the culture and practice of the bankruptcy courts” said Mike West, bankruptcy administrator for the Middle District of North Carolina in Greensboro, North Carolina speaking with the Business Journal of the Greater Triad Area. West also expects backups in the bankruptcy courts because of no additional funding for the courts for the expanded demands under the Act.
Many administrators of legal aid agencies do not see relief on the horizon for their efforts to help low-income bankruptcy filers when the Act goes into effect. If more attorneys steer away from pro bono or reduced fee work, these agencies see less help being available for these filers. While some agencies employ attorneys, some agencies are already referring their bankruptcy filers to outside attorneys.