Lawyer: Bankruptcy reform is 'bad bill'
By JEANNE RIDGWAY
Courier-Post Staff
Attorney Lee Perlman laments new bankruptcy legislation passed by Congress on Thursday, warning that the proposed law makes it impossible for thousands of people to wipe away their debt, hurting the economically vulnerable.
"This is a bad bill. It's going to affect debtors who can afford it the least," said Perlman, who has a practice in Cherry Hill, Mount Holly and Toms River.
Meanwhile, a Philadelphia credit counselor thinks the new law will benefit consumers who would rather avoid Chapter 7 bankruptcy and who want to pay back their debt under more favorable terms. Chapter 7 bankruptcy puts a stain on a person's credit report for up to 10 years, she said.
"I think that some people who chose bankruptcy first may not be aware of other options," said Patricia Hasson, president of the nonprofit Consumer Credit Counseling Service of Delaware Valley, which has an office in Cherry Hill.
The biggest overhaul of bankruptcy laws in a quarter-century sets up an income-based test for measuring a debtor's ability to repay. Called the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, the new law passed the House by a vote of 302-106.
Those with income above their state's median income who can repay at least $6,000 over five years - $100 a month - would be forced into Chapter 13, where a judge would then order a repayment plan. President Bush has said that he will sign the law, putting it into effect within six months.
Perlman said the new law raises barriers making it more difficult and expensive for people to file bankruptcy.
"The bill's intent is to force more people into Chapter 13 - a repayment bankruptcy," he said.
Debtors will need to first seek and pay for credit counseling and present a certificate of completion prior to filing for bankruptcy, Perlman said. In some cases, he added, debtors may not have enough time to complete counseling before banks act to foreclose on homes and repossess vehicles. Under the current law, filing for Chapter 7 bankruptcy - a process which wipes clean most debts exclusive of past-due taxes - stops all collection activity including foreclosures and repossessions and allows debtors to keep their "homesteads" and some other assets.
"The burden of proof is going to shift in the bill from the creditor to the debtor," Perlman said.
Banks, credit-card issuers and retailers have lobbied vigorously for bankruptcy revisions that would force more people to repay at least part of their debt. Backers of the new law argue that bankruptcy is frequently used as a refuge for gamblers, impulse shoppers, divorced or separated fathers avoiding child support, and multimillionaires - often celebrities - who buy mansions in states with liberal homestead exemptions to shelter assets from creditors.
However, according to Perlman, most of his clients fit none of those descriptions. Most are average people experiencing overwhelming debt following job loss, divorce or major illnesses, he said. Illness and medical bills contributed to roughly half of all personal bankruptcies filed in 2001, according to a Harvard Medical School study.
Hasson agrees that some people face insurmountable debt due to no fault of their own, but others slip into trouble by using their credit cards as supplemental income, with no payback plan, she said. These debtors - if they act quickly before their bills becomes unmanageable - may be helped by the new law's counseling provision and could avoid bankruptcy completely, she said. Hasson's nonprofit organization provides free one-on-one credit and budget counseling.
"While I support the intent of the bill - to let people know about the option of credit counseling - I don't think it's a solution for all bankruptcy clients," said Hasson. "It could be that someone is managing their budget very well, and then they are hit by a catastrophe."
Now that the bill has passed the House, Hasson suspects people contemplating bankruptcy will rush to file under the current law. She also wonders whether debtors will be able to find the credit counselors that they need once the new law goes into effect.
"The real question is: Are there going to be enough quality credit counseling services to go around?" Hasson asked.
She noted that unscrupulous credit counselors exist.
New personal bankruptcy filings declined to 1,599,986 from 1,613,097 in the year ending last June 30, breaking an upward trend of recent years. But in New Jersey, nonbusiness bankruptcy filings have been on the rise since at least 2000. In that year, 36,645 bankruptcies were filed, compared to 40,596 in 2004.
According to the American Bankruptcy Institute, the new legislation will prohibit between 30,000 and 210,000 people from dissolving their debts in bankruptcy each year in exchange for forfeiting some assets.
Under the new law, those with insufficient assets or income may still file a Chapter 7 bankruptcy, which if approved by a judge erases debts entirely.