The Bankruptcy Reform Act introduces a number of new hoops filers need to jump through; here’s a quick rundown on what business owners need to know
On Oct. 17, the Bankruptcy Reform Act went into effect, making sweeping changes aimed at curbing filings and causing a rush of filers prior to implementation.
Now that things have settled down somewhat, attorneys and consumers are busy learning the new rules. The reforms are the most noticeable changes in the bankruptcy system in years, but skeptics say they may not achieve what they were designed to do.
“The general thrust is to make it more difficult to file bankruptcy,” said Martin Snodgrass, chair of the Washington State Bar Association’s Creditor-Debtor Section.
The first noticeable change for those filing Chapter 7 or Chapter 13 is the required pre-filing debtor-counseling course. Snodgrass said the courses, typically done over the phone or Internet, run about $50.
The courses are run by nonprofit debt counseling agencies, approved by the United States Trustees Office. Snodgrass said many counseling agencies are looking to get accredited in the coming months to serve clients under the new law.
Anyone filing must be complete the debtor-education course to finalize their case.
Chapter 7, which typically clears an individual debtor and allows for a fresh start, has seen the most changes due to the act.
“The theory is if you can repay something to your creditors, you should not be given a free pass in Chapter 7,” said Snodgrass.
The changes in Chapter 7 require filers to submit quite a bit more financial information than before. According to Snodgrass, filers must now have filed all their tax returns and also must submit more financial information, such as six months worth of pay stubs and bank statements, to verify their financial status and income.
A filer’s financial information will also be subjected to a “means test” to determine eligibility. He said because of the new means test, most people who earn in excess of the state is median income — $42,452 for a single wage earner and $70,857 for a family of four — will not be eligible for Chapter 7. Instead, these people may have their case converted to a Chapter 13.
Chapter 13 typically requires creditors to pay back debtors over a period of five years.
Filers under the new laws will also find themselves less eligible to be discharged from certain debts than before, said Snodgrass. Debts stemming from fraud, conversion or intentional injury will no longer be allowable discharges.
Chapter 11 has seen fewer noticeable changes, according to Snodgrass, and will now be a more streamlined process.
The changes brought forth by the Bankruptcy Reform Act will require a substantial increase in paperwork, principally to verify income by using the means test, said Snodgrass. Filing will also now be more expensive because of higher legal fees.
“We figure that is going to take us an extra two to three hours in preparing the paperwork, and at attorneys’ rates – that’s not cheap.” Also an added expense for debtors is an increase in filing rates for Chapter 7, which will now cost $274, up from $209.
Bellingham bankruptcy attorney James Sturdevant said the money spent to process all the information and carry out proceedings, combined with the higher costs to file, will certainly outweigh any money gained through the laws set by the Bankruptcy Reform Act. To carry out the new bankruptcy rules, more U.S. Justice Department staff will also be needed to administer pay-back schedules from debtors to creditors, he said.
While not all changes are unjustified, many of them are mean-spirited shots at consumers, he said. According to Sturdevant, the hassles to verify income for the average person who files are “excessive and embarrassing.” People will take the income and expense figures more literally now, he said.
The long-term effects of the new bankruptcy laws on filings have yet to be seen, but Snodgrass and Sturdevant are both skeptical the new laws will do much to decrease the number of filings.
Sturdevant said there might be a slight increase in Chapter 13 filings, but revenue paid back to credit companies won’t be seen by consumers. Snodgrass contends the new codes might even make it easier to file for Chapter 7 in a state like Washington, where the median income is relatively high.
Before the reform, the means test was subjective and budgets were analyzed and contested, said Snodgrass. Now, if you fall below the median income, you will likely qualify for Chapter 7, he said.
In many parts of the state where cost of living and salaries are lower in comparison to the Seattle area, it may be relatively easy to qualify, according to Snodgrass.
Dianne Wilkman, president of Springboard Nonprofit Consumer Credit Management, said credit counselors are in a tough spot because of the new laws.
“Lawyers are afraid we will divert filers, and creditors are probably afraid we won’t divert them,” she said. “It’s a narrow line to walk.”
Sturdevant said the current system paves the way for personal debt. “Debtors will still want to file bankruptcy,” he said. “But now it will just be more expensive and take more effort.”