Paying the price

New bankruptcy law put the financial futures of some Americans on the line

It wasn't as if they were giving away free door prizes, but business was extremely brisk in the offices of the U.S. Bankruptcy Court District of Montana on Friday, Oct. 14, as the Sunday midnight deadline for filing for bankruptcy under the old laws fast approached.

"For the period of October 14 through 17, 670 bankruptcies were filed here," said Bernard F. McCarthy, clerk of the court in Butte. "For this same period last year, 27 were filed. It's all pretty amazing.

"What's dramatic for us is that virtually all our filings are usually done by mail because of the vast distances people must drive to get here - we're the largest single-judge judicial district in the geographical U.S. We encompass the entire state. On Friday, we had people driving 400 to 600 miles round-trip to file bankruptcy."

Why the rush?

"It's about panic and the new bankruptcy laws," said Greg Paskell, a Kalispell attorney specializing in bankruptcy, who had his own set of statistics to report: "I filed 78 bankruptcies in the Flathead in the past 10 days."

The new legislation, officially known as the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, has been controversial since its passage in April. At issue is a tightening of the eligibility requirements for people wanting to declare bankruptcy.

"The intent of the law is not terrible," Paskell said. "There has definitely been some abuse of the system. But the law is a poorly drafted law that has lost sight of the goal."

The goal of the previous bankruptcy laws was generally understood by U.S. courts to be one of offering debtors a "fresh start" in life by relieving them of most debts. A debtor only had to repay his creditors to the extent that the debtor was able to do this - if at all.

The most common forms of bankruptcy for personal debtors - as opposed to business debtors - are Chapter 7 and Chapter 13.

Chapter 7 involves forgiveness of almost all of the filer's debts.

In Chapter 13, under a three- to five-year plan, a debtor can keep all assets and attempt to repay some debts with income that remains after living expenses have been met.

Eligibility for each of these is determined under the new laws by use of a means test.

The debtor's current annual income is measured against the median income for Montana residents.

To calculate the debtor's annual income, his or her current monthly income must be determined. This is done by obtaining income statements for the six months before the filing date and then dividing that number by six. Multiplying the resulting figure by 12 will produce the number to be used as the debtor's average annual income.

This is then compared with the published median income for Montana residents under the means test. If the average annual income is lower than the median, the debtor will be eligible to file for Chapter 7.

"The debtor can still be eligible for - and be forced into - a Chapter 13 if the bankruptcy trustee determines that given the totality of circumstances, the debtor could still pay a portion of his unsecured creditors back," Paskell said.

Certain assets are considered exempt in a bankruptcy. These include: $100,000 equity per homestead, $2,500 per person equity in a vehicle, and as much as $4,800 for household goods, Paskell said.

"The impact of the law is economic," Paskell said. "The new laws are more expensive than the old laws."

For example, they require the debtor to have pre- and post-bankruptcy financial counseling, which will cost an additional $100. Court filing fees will increase from $209 to $274.

"People will have to pay higher attorneys' fees, since we will need to produce a lot more paper and documents to support expenses and income," Paskell said. "Clients will have to pay between $125 and $200 for us to appraise their personal property."

The appraisal fee has to do with attorneys now being responsible for confirming that the client's assets - or lack of assets - are exactly what the client claims them to be.

"My client is now adverse to me," Paskell said. "It's the only law I'm aware of where I'm not only the advocate, I'm also a policeman."

McCarthy believes that "What the law is trying to get at is to make attorneys more responsible for what their debtors say or don't say."

The new laws include the phrase "bankruptcy abuse prevention."

According to Paskell, "The primary reasons in this county for declaring bankruptcy are lack of medical insurance to cover major illnesses and catastrophic medical costs."

Dr. David Himmelstein, lead author of a 2001 Harvard study said: "Unless you're Bill Gates, you're just one serious illness away from bankruptcy. Most of the medically bankrupt were average Americans who happened to get sick."

In an e-mail correspondence with the Daily Inter Lake, Himmelstein said that a more recent study than his "that asked a sample of people whether they had been driven into bankruptcy by medical problems, found results similar to ours."

Bankruptcy is not without its emotional costs. Paskell cites "humiliation and stigma" as a few of them. Also, he said, the debtor's credit score is likely to drop at least 100 points following bankruptcy proceedings.

Once the paperwork is filed - either with an attorney or pro se - the actual bankruptcy process begins with the appointment of a Chapter 7 trustee in Missoula or Chapter 13 trustee in Great Falls. This is followed by a hearing in Kalispell and a review of the paperwork.

"Sixty days later the case will close, or there will be a complaint that you're in the wrong chapter," Paskell said.

Bankruptcy attorney fees, which formerly were $500 to 2,000 under the old laws, will probably increase to $900 to $2,000 under the new laws, he said.

On the Net:

http://www.mtb.uscourts.gov/ for the U.S. Bankruptcy Court District of Montana.

Business reporter George Kingson may be reached at 758-4438 or by e-mail at gkingson@dailyinterlake.com