Bankruptcy Law’s 1-Year Report Card

Wednesday December 6, 6:09 pm ET
By Dan Caterinicchia, AP Business Writer 
Filings Down, but Too Soon to Call Year-Old Bankruptcy Act a Success

WASHINGTON (AP) — Bankruptcy filings have dropped dramatically in the year since a law went into effect aimed at curbing abuse of the system. But it’s too soon to gauge the act’s effectiveness, the legislation’s most ardent supporters said Wednesday at a hearing held to study the law’s impact.
About 750,000 personal bankruptcy cases were filed in the month before the law went into effect Oct. 17, 2005, compared to fewer than 500,000 cases in the past 12 months.

Many consumers rushed to file ahead of the new law, which requires a "means test" that determines whether filers qualify to have their debt erased under Chapter 7 or must file for a type of bankruptcy that requires repayment of a percentage of their debt over time.

"Means testing is a workable system," says Clifford J. White III, director of the Justice Department’s Executive Office for U.S. Trustees, which has responsibility for the bankruptcy system. But White added that the test’s long-term effectiveness is unknown since the number of filings has been so low.

White, who testified before the Senate Judiciary Subcommittee on Administrative Oversight and the Courts, also urged the mandating of "smart forms" that would automate most court procedures involved in bankruptcy filings. That could help keep the bankruptcy system efficient if the number of filings increase in the future as trends indicate they will, he said.

Subcommittee Chairman Sen. Jeff Sessions, R-Ala., agreed that it was too early to draw conclusions about the law’s success. But he said the drop in overall filings coupled with an increase in the percentage of people seeking Chapter 13 protection, in which a debtor can use future earnings to pay back creditors, appears to show the system works.

From January to September, the personal and business bankruptcies dropped to 443,750 from 1.41 million in the year-ago period, according to data released Tuesday by the Administrative Office of the U.S. Courts. Personal filings fell to 429,522 from 1.38 million, while business bankruptcies declined to 14,228 from 26,275 in the same period.

But the subcommittee’s incoming chairman, Sen. Charles Schumer, D-N.Y., said the bill may not go far enough in distinguishing between people who were financially ruined for legitimate reasons like job loss or the death of a spouse, and those who are "reckless high rollers."

The act should be "targeted at the nation’s cheats and not its cheated," he added.

Also under the new law, people seeking bankruptcy protection are required to pay for credit counseling courses, although the courts can waive the fees for low-income debtors.

Bankruptcy lawyers have said their caseloads plummeted after the law went into effect, requiring many to raise their fees, and deride the act for adding unnecessary obstacles for people who legitimately need the protection.

"The law is not squeezing out the supposed legions of abusive filers because they were never there in the first place," Henry Sommer, president of the National Association of Consumer Bankruptcy Attorneys, said in a release. "All these ill-considered law changes are doing is erecting pointless additional hurdles and costs in the way of desperate families who legitimately need the fresh start of bankruptcy."

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