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The Honolulu Advertiser
Posted on: Thursday, February 23, 2006

Bankruptcy study says law failing

By Marcy Gordon
Associated Press

WASHINGTON A new law making it harder to erase debts in bankruptcy has failed to stop abuses and has stymied people who have legitimate reasons to file, a group representing bankruptcy attorneys said yesterday.

A report released by the National Association of Consumer Bankruptcy Attorneys was based on an analytical study of 61,335 people who have gone to credit-counseling agencies, the required first step before filing bankruptcy under the law that took effect on Oct. 17.

Of the 61,335, 97 percent were unable to repay any debts and 79 percent had gotten into financial trouble because of job loss, huge medical expenses or the death of a spouse, the report said.

"Contrary to the claims of proponents of bankruptcy law changes that they would zero in on the alleged legions of 'deadbeats,' " the new law is doing no measurable good, said Brad Botes, executive director of the bankruptcy lawyers group.

"Instead, (it has) put new hurdles in the path of people who are already flat on their back due to financial crises over which they have no control."

The new requirement for credit counseling, which involves drawing up a debt management plan for consumers, "simply imposes new costs and time burdens on individuals who can ill afford either," Botes said.

Noting a decline in personal bankruptcy filings since the law went into effect, he said it had occurred because many people "may mistakenly believe that the courthouse doors are barred to them" under the law.

Laura Fisher, a spokeswoman for the American Bankers Association, said the recent trend in filings was "a very small snapshot of the (bankruptcy) system right now. ... We haven't gotten to a 'new normal' right now."

The new law, which brought the most sweeping overhaul of the U.S. Bankruptcy Code in a generation, bars those with above-average income from Chapter 7 where debts can be wiped out entirely except under special circumstances.

Those deemed by a new "means test" to have at least $100 a month left over after paying certain debts and expenses now have to file, instead, a five-year repayment plan under the more restrictive Chapter 13.

Financial services companies and other proponents of the law have maintained that the bankruptcy process has been abused by gamblers, compulsive shoppers and multimillionaires who buy mansions in states with liberal homestead exemptions to shelter assets from creditors. They say the abuse has resulted in higher interest rates for everyone else.

Opponents have said the changes in the law will fall especially hard on low-income working people, single mothers, minorities and the elderly, and will remove a safety net for those who have lost their jobs or face mounting medical bills.

Figures released last month by Lundquist Consulting Inc. showed a sharp drop in the number of bankruptcy filings since the Oct. 17 deadline.

Within the smaller number overall, a greater proportion were made under Chapter 13 versus Chapter 7 of the code.

Nearly 60 percent of filings made after Oct. 17 came under Chapter 13, compared with the usual 30 percent under the old regime, according to the figures.