A new, stricter bankruptcy law that took effect a year ago has led to an 83 percent drop in filings in Hawai'i.

Since the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 replaced the old law on Oct. 17, 2005, Hawai'i filings are near a 16-year low.

The federal law increased the cost of filing and added a requirement that filers attend financial counseling sessions.

Local bankruptcy attorneys said the higher costs are hitting people at a time when they are strapped for cash and that the counseling comes too late to help with their money woes. The law also hasn't steered as many people into debt management plans, an alternative to bankruptcy, as some proponents had hoped.

"They did one good thing — bankruptcies are way down," said Dawn Smith, a Honolulu bankruptcy attorney. "But I'd like someone to explain to me if people are just paying their debts or if they are all in hiding."

Banks, credit-card issuers and other lenders sought changes in the bankruptcy law because they said too many consumers were quick to shed debt through bankruptcies even if they could make partial payments.

The companies said the old law resulted in higher interest rates and costs for consumers who were paying their bills on time. The new law doesn't prevent anyone from filing for bankruptcy, though it added provisions aimed at getting more higher-income people to pay off debts while in bankruptcy.

Earlier this year the National Association of Consumer Bankruptcy Attorneys examined bankruptcy filings and determined more hurdles were being placed in the way of people already stressed out by financial crises.

It found in about 97 percent of the cases people were unable to repay any debt and that pre-bankruptcy counseling was not steering as many into debt management plans as the new law's proponents had envisioned. It determined about four out of five people seen by credit counseling agencies weren't reckless spenders trying to cancel debts, but were suffering because of a loss of a job, medical expenses, divorce or death of a loved one.

"The law is trying to educate people when the barn door is already closed, so to speak," said Wendy Burkholder, head of Consumer Credit Counseling Service.

She said out of almost 700 counseling sessions in the past year, only two or three people have chosen to set up debt management plans instead of bankruptcy.

"I don't really see the abuse that the law was intended to weed out," said Greg Dunn, a Honolulu attorney who concentrates on bankruptcies. "The people who would have qualified under the old law are still pretty much qualifying."

LEGAL ASSISTANCE

Experts say the more complicated law makes it more difficult for people to file without the help of an attorney.

"I've seen a lot more people having to hire attorneys because of the additional requirements," said lawyer Paul Meares.

Edward, a Waipahu resident who asked that his last name not be used because of the stigma associated with bankruptcy, spent most of the past year trying to pay off $60,000 in credit card and other debt but ended up filing for bankruptcy in September.

Edward would have saved time and money had he filed before the new law took effect.

"Had I known a year ago that it was going to be inevitable, I would have filed," Edward said. "It would have been a lot easier."

The law has been criticized as being overly lender friendly.

Some credit companies may have lightened up on their approach to collecting past-due payments. Under the new law, creditors can have their claims reduced by the court if they are too rigid in negotiations with debtors before bankruptcy.

Marvin Dang, whose law firm is one of the biggest in Honolulu collecting delinquent credit-card debt, said companies have given him more flexibility to work out payment plans with debtors.

Said Michael Glenn, a bankruptcy attorney: "These days a creditor is more than willing to work out a payment plan."

Dang said he's seen the number of accounts referred to him rise by at least 10 percent over the past year. He hasn't seen a corresponding rise in bankruptcies, suggesting to him that more people are trying to make good on their debts.

TROUBLE AHEAD

Still, this year's decline in filings may be short-lived as Hawai'i's economy and real estate market slows and more people find their finances strained. In addition, some of the slowdown might be linked to people who filed last year because they wanted to avoid requirements under the new law.

Some people also may be confused about their eligibility under the new law.

A number of individuals may have been under the impression they would not be eligible for bankruptcy relief, said Steve Katzman, who as U.S. trustee for Southern California and Hawai'i oversees administration and enforcement of bankruptcy laws.

One of the biggest changes in the law is a test that determines whether certain higher-income people have to file for a Chapter 13 bankruptcy, under which at least a portion of the debt is repaid over time.

Katzman said statistics show about 99 percent of people still qualify for a Chapter 7 bankruptcy after screening for income. That's the more traditional bankruptcy form that allows people a fresh financial start after liquidating certain assets.

Katzman said many of the remaining 1 percent still are able to file for Chapter 7 after a further review of their finances.

Glenn said the bankruptcy filing rate should creep up to three-quarters of what it was once more people understand bankruptcies are still a viable option for them, ridding them of calls at work and home from bill collectors who sometimes threaten lawsuits.

"They still have just as much right to file for bankruptcy as before," Glenn said.

FINANCIAL RELIEF

At least one person is happy with the changes in the law. Having discovered in counseling that she didn't have to file for bankruptcy, Kanani, a 26-year-old Maui resident who used credit cards to help fund her college expenses, was paying $600 a month on 10 credit cards, one of which was charging her 29 percent annual interest.

With the help of Consumer Credit Counseling Service, Kanani, who also asked that her last name not be used because of the perception of debtors, was able to propose paying off a lower amount to her credit card companies.

She's kept up with the debt management plan worked out for her and didn't tarnish her credit record with a bankruptcy, something that would have made it difficult to get new credit or loans for at least seven years.

"I only have a few credit cards now to pay off," she said. "I'm so happy."

Edward of Waipahu also is relieved, having put the situation behind him. He said his credit report would have been tainted by his late payments anyway.

"Filing to me has changed my outlook," he said. "Of course it means my credit will be nonexistent for seven years but it will still make me a happier person."

Reach Greg Wiles at gwiles@honoluluadvertiser.com.