Law change spurs
surge in filings

Hawaii's are up 20.8 percent

CHICAGO » File bankruptcy now -- before the law changes!

That's the message -- or exhortation -- that attorneys are making across the country, in TV commercials, print ads and mailings, urging Americans to seek bankruptcy court protection before a new law makes it harder for them to walk away from their debts.

Debtors are responding. Counting down toward the Oct. 17 effective date for the biggest reform in U.S. bankruptcy law in a generation, personal bankruptcy filings have jumped this month to the highest on record. Filings averaged more than 9,000 per day, up roughly 50 percent from last year's average daily volume, during the first two weeks of September.

The number is expected to keep climbing, reflecting a growing sense of urgency as the deadline nears.

Attorney Melvin James Kaplan, who runs a consumer bankruptcy practice in Chicago, hasn't seen a rush this big in his 48 years in the business. The volume of calls to his office has been increasing all month and tripled in the past week.

"It's just getting insane," Kaplan said. "The information has been out there for months. I guess people are just waiting till the last minute."

The rush is on in every region and most states, based on data compiled for the Associated Press by Lundquist Consulting Inc., a Burlingame, Calif.-based financial research firm.

The intensified interest comes from the bankruptcy law makeover signed by President Bush on April 20, a 501-page bill that bears the markings of the Republican-dominated Congress that passed it after an eight-year campaign headed by the banking, credit card and retailing industries.

Among the most noteworthy of the changes are new limitations on filing for personal bankruptcy, including barring those with above-average income from Chapter 7 -- where debts can be wiped out entirely -- except under special circumstances. Those deemed by a "means test" to have at least $100 a month left over after paying certain debts and expenses will have to file a 5-year repayment plan under the more restrictive Chapter 13 instead.

People also will be required to get professional credit counseling before being allowed to file.

Proponents welcome what they say is a long-needed crackdown on those who rack up credit card debts recklessly only to shed them in Chapter 7. They maintain that abuse of the bankruptcy process results in higher interest rates for everyone else, a "tax" averaging $400 per family per year.

"We've got greater fairness now" under the new law, said Wayne Abernathy, executive director for financial institutions policy at the American Bankers Association, an industry group representing banks and credit card issuers. "Where people have the means to pay, they're going to have to pay something."

Opponents, however, contend it will unfairly box in people who become buried in debt after unexpectedly losing their jobs or suffering serious health problems. They say it rewards and encourages the tactics of card issuers and other lenders enticing consumers into easy debt.

Travis Plunkett, legislative director of the Consumer Federation of America, called the law "harmful and mean-spirited." While it will halt some abuse by high-fliers who shouldn't be filing for bankruptcy, he said, it also will trap people and businesses that got into financial trouble through little or no fault of their own and block people's realistic chances at starting over.

And some economists say that taking away the traditional "fresh start" option from those middle-income people will be harmful to the U.S. economy, which has benefited greatly from entrepreneurial and other risk-taking.

Businesses seeking to reorganize could feel the law's changes more acutely than many consumers.

Big businesses must complete their debt overhauls within 18 months or lose control of the process, with mom-and-pop ventures also put on a fast track. Severe restrictions on pay packages now routinely awarded to top employees in bankruptcy may make it difficult to keep senior management in place.

But it's the impending change in personal bankruptcy requirements that have struck the biggest nerve with the public.

The number of personal bankruptcies leaped to an all-time high in the second quarter, when the legislation was passed, and the surge has since accelerated. About 1.24 million filings had been made nationwide in 2005 through Sept. 17, reflecting a 9.2 percent increase over last year and closing in on the record of 1.62 million filings in 2003, said Lundquist Consulting.

In Hawaii, year-to-date filings through Friday were up 20.8 percent to 2,792 from 2,312 at the same point a year ago.

Thirty-seven states have seen double-digit percentage jumps in personal bankruptcy filings since March, when the initial surge began with the legislation's passage by Congress. Seven states -- Alaska, West Virginia, North Dakota, Iowa, Minnesota, Colorado and South Dakota -- had increases of more than 25 percent over the same period a year ago; only South Carolina, Utah and Virginia saw declines.

Every weekday, scores of people arrive at a federal office in downtown Chicago where they sit quietly in an anteroom, waiting for the five- to 10-minute session with a trustee that will launch the Chapter 7 bankruptcy process and -- they hope -- wipe out their debts.

Lately, it takes three trustees to handle the daily crush at the U.S. Trustee Program, the agency that enforces bankruptcy laws. Ron Peterson, a Chicago attorney who also is retained by the program as a Chapter 7 trustee, is scheduled to hear 66 cases in a single day later this month.

"I'm seeing cases that wouldn't have been filed a year ago," he said. "Mostly poor people, but also somebody with a $4 million house in Kenilworth," a wealthy Chicago suburb.

Chris Szurgot, whose bankruptcy case was heard on a recent day, couldn't afford to wait. Like the vast majority of all Chapter 7 filers, the 44-year-old suburban Chicago man earns less than the median income and wouldn't be prohibited from filing under the same chapter when the law changes. But the rash of commercials prompted him to pick up the phone and call his attorney.

"I thought I'd better go check it out," said Szurgot as he waited for his name to be called by a trustee. "Because if I can't do it, I'm going to be stuck."

Szurgot, of Crestwood, Ill., said he has run up $50,000 in unpaid medical bills -- even with insurance -- for treatment of a rare disorder and he can't begin to pay them off from his annual income of roughly half that as a heating and air conditioning maintenance worker.

"I'm not poverty-stricken but I'm a single parent with bills," going $400 deeper in the hole every month due to his obligations, he said.

Single parents and those overwhelmed by medical bills are among those that opponents of the bankruptcy law revisions claim will be hurt most. Expensive illnesses lead to about half of all personal bankruptcies, according to a Harvard University study released in February. Consumers Union found separately that single mothers trying to make ends meet comprise a large portion of the filers.

Kenneth Klee, a UCLA law professor and former Republican staffer for the House Judiciary Committee who helped draft the last bankruptcy law overhaul in the 1970s, predicts the new law will have "a profound negative effect" that extends well beyond the debtors. "If debtors aren't going to be able to get a fresh start, not only is it bad for our economy but it's bad for the non-bankrupt sector," he said. "You're going to have people going into the underground economy, not paying their taxes; they'll be dispirited and there will be more crime."

Hurricane Katrina victims may face tricky barriers to bankruptcy because of the new law's requirements for more extensive documentation and stricter deadlines.

An AP-Ipsos poll found that 61 percent of respondents favored a delay in the law's implementation in light of the large numbers of people who may need to seek bankruptcy protection because of Katrina. The telephone poll of 1,000 adults in 48 states was conducted Sept. 16-18 by Ipsos, an international polling company.

Despite benefiting from the recent uptick in filings, bankruptcy attorneys also face such a significant new obligation after the deadline that some are talking of leaving the field: They must certify that they made efforts to verify the truthfulness of what their clients say about their debts and holdings. Legal fees may double accordingly, according to John Penn, president of the American Bankruptcy Institute.

As a result of the added legal and credit-counseling fees, the cost of filing personal bankruptcy is likely to rise for everyone.

"For somebody who's desperately poor, that may be a barrier to them to file at all," said Peterson, who predicts the average cost will rise as much as $300 or more. "So more people may go to non-lawyers to file it," leaving them more vulnerable in the process, he said.

Anywhere from 5 percent to 10 percent of filers could be barred from using Chapter 7 to liquidate their debts under the new law, according to Penn of the ABI, a group of bankruptcy judges, lawyers and other experts. They would be shifted instead to Chapter 13, where they could be forced to pay back a significant portion of their debt.

All that's certain for now is that the rush to file is likely to continue until midnight of Oct. 16.

"They're coming out of the woodwork," Kaplan said.

Personal bankruptcy filings

STATE	PERCENTAGE.	FILINGS
Alabama	6%	24,900
Alaska	34%	1,057
Arizona	1 4.8%	20,745
Arkansas	17.6%	15,595
California	13.2%	78,189
Colorado	26.6%	21,075
Connecticut	15.6%	7,479
Delaware	1.8%	1,991
District of Columbia	3.7%	1,110
Florida	10.7%	54,353
Georgia	1.0%	43,557
Hawaii	22.7%	2,148
Idaho	12.6%	6,181
Illinois	18%	52,436
Indiana	18.7%	37,794
Iowa	27.8%	9,855
Kansas	18.7%	11,651
Kentucky	22.2%	19,660
Louisiana	11%	18,867
Maine	23%	3,232
Maryland	1.5%	16,845
Massachusetts	23.6%	12,594
Michigan	23.7%	44,385
Minnesota	26.7%	12,838
Mississippi	5.6%	12,305
Missouri	22.4%	25,970
Montana	15.2%	2,732
Nebraska	19.1%	6,061
Nevada	8.2%	10,829
New Hampshire	15%	3,010
New Jersey	5.4%	24,368
New Mexico	17%	6,323
New York	21.3%	53,840
North Carolina	10.5%	22,545
North Dakota	27.8%	1,690
Ohio	24.2%	65,123
Oklahoma	19.4%	18,289
Oregon	12.6%	16,050
Pennsylvania	16.7%	38,869
Rhode Island	24.7%	2,906
South Carolina	-- 3.8%	8,288
South Dakota	25.7%	2,058
Tennessee	2.6%	35,494
Texas	17.1%	60,360
Utah	-- 2.5%	11,714
Vermont	24.6%	1,190
Virginia	--1.3%	22,578
Washington	4.4%	22,765
West Virginia	31.9%	8,476
Wisconsin	22.5%	19,819
Wyoming	9.7%	1,672
TOTAL*	14.3%	1,023,881

New law offers
several features

WASHINGTON » The most sweeping rewrite of the U.S. Bankruptcy Code in a quarter century, making it harder for debtors to erase credit card and other obligations in court proceedings, goes into effect Oct. 17. The legislation was passed by Congress and signed into law by President Bush in April after an eight-year campaign by banks, retailers and credit card companies.

A major provision of the law sets up an income test for determining whether people can have their debts canceled in exchange for forfeiting certain assets or if they must repay them under a court-ordered plan. The change will affect 30,000 to 210,000 people a year, and there already has been a rush to the courthouse by those wishing to file for bankruptcy under the current law, which generally allows federal bankruptcy judges leeway to determine the fate of debtors' assets and how much they must repay.

Financial services companies and other proponents of the change 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.

Opponents have said the new 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.

Among the changes made by the new law: