With new law, Vt. bankruptcies jump
After declining last year for the first time in four years, bankruptcies in Vermont have started to spike again and lawyers are pointing a collective finger at the primary culprit: the new federal bankruptcy law that takes effect in October.
The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, which was signed into law by President Bush on April 20, will make it more difficult for debt-saddled consumers to liquidate their debts under a Chapter 7 bankruptcy filing. Beginning in October, many who would have been able to file for Chapter 7 will instead be forced to pay off at least a part of their debts under Chapter 13.
With an Oct. 17 deadline looming for the law to take effect, many are rushing to file under Chapter 7, two of the state's bankruptcy lawyers said. And the recent spike in filings at U.S. Bankruptcy Court in Rutland appears to bear that out with bankruptcies running ahead of last year.
A total of 673 bankruptcies were filed through May 6 compared with 654 for the same period in 2004, according to the only bankruptcy court in the state.
The year didn't start out that way, though. Continuing last year's decline in bankruptcies, there were 213 filings through the first two months of 2005, compared to 291 filings for the same two-month period last year.
But starting in March - which coincided with extensive news coverage of the fight over the bankruptcy overhaul legislation in Congress - bankruptcies began to surge in the state.
In March, 220 bankruptcies were filed compared to 176 in March the prior year. The jump continued in April with 197 filings verses 147 for the same month last year. So far, that upward trend is continuing in this month with 43 filings as of May 6 compared to 38 a year earlier.
Burlington bankruptcy lawyer Todd Taylor attributed most of the recent spike in filings to the new law.
"People are trying to beat the change in the law," said Taylor, who has specialized in bankruptcy law for 20 years.
Taylor added that part of the jump might also be blamed on credit card bills that come due following the Christmas holidays, pushing some consumers over the financial edge.
Like many lawyers who specialize in bankruptcies, Taylor railed against the new law, calling it grossly unfair to those who opt for bankruptcy as a last resort.
"The new law is horrendous," he said. "It's brutal for people considering bankruptcy."
Under the current law, Taylor estimated the average fee for a Chapter 7 bankruptcy filing in the state is $800 and $1,500 for Chapter 13.
But he warned that the new law would result in a doubling or even a tripling the cost for someone filing for bankruptcy. Under the new law, lawyers are responsible for verifying the assets of their clients. Taylor said the cost to conduct an asset search will wind up being passed on to their clients.
With lawyers having to vouch for a client's assets, the cost of malpractice insurance will jump as well, according to Taylor, who added that he's heard of one case where a bankruptcy lawyer in the state was notified that their insurance would be cancelled when the new law takes effect.
He said there is also the added cost of credit counseling and financial management courses required of someone before filing for bankruptcy.
The bottom line, he said, is that the costs associated with the new law will put bankruptcy out of the reach of many who truly need it.
Bethel lawyer Ray Obuchowski has no doubt that the recent jump in bankruptcies is a direct result of uncertainty over the new law.
"It will take time to sort out what the new law is going to do but right now it's always an issue of predictability and certainty and we know what the current laws provide," he said. "But for an attorney to advise someone in the future there's just too much uncertainty."
Obuchowski concurred with Taylor that the cost to file for bankruptcy will likely rise dramatically once the law takes effect in October. And like Taylor, he expressed concern that the cost of malpractice insurance will soar, which will have to be passed on to clients. He said the effect of the added costs will ironically make bankruptcy unaffordable, forcing many debtors to represent themselves.
"I think you'll probably see more pro se work, which unfortunately will clog down the system," he said.
Taylor said the only beneficiaries of the new law are the credit card and banking industries that undertook a massive lobbying effort to get the bill through Congress.
"Millions of dollars went into campaign contributions in the last election cycle," he said. "So this is really bought-and-paid-for legislation when you get right down to it."
He said divorce, unemployment and illness remain the major causes of bankruptcy.
"It punishes people who truly need bankruptcy," Taylor said.
Credit card debt is a factor as well with many strapped consumers relying on their credit cards to make ends meet, Taylor and other bankruptcy lawyers have said.
But Chris D'Elia of the Vermont Bankers Association defended the new law, arguing that the jump in bankruptcies in the past few years indicated that the system was being abused.
"Rather than using it as a last resort, with the number of filings that have gone on for years and it seems to have increased over the years, it was becoming much more frequent for discharging your debt," said D'Elia, the VBA's president.
He said if there are any unintended consequences from the law, those issues can be addressed at a later date. But for now, he said any changes should wait until after the law rolls out in October.
Obuchowski, however, was skeptical that any changes to the law would be forthcoming given the current makeup of Congress. And he said while there are abuses in any system or program, the current bankruptcy law has been working "pretty well."
Critics of the new law have singled out the credit card industry as a major culprit in enticing people with credit card solicitations. And while acknowledging that the industry bears some responsibility. D'Elia also said others share in that responsibility, including the consumer. He said consumers need to be better educated when it comes to managing their finances.
He also pointed out that the solicitations consumers receive in the mail come from out-of-state banks like Bank of America, Citibank, MBNA and not Vermont banks.
Contact Bruce Edwards at firstname.lastname@example.org.
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