FEDERAL BANKRUPTCY COURT Rush likely to avoid tough new law

One attorney said the new law could force debtors to choose between keeping their home or their car.
By DON SHILLING
and CYNTHIA VINARSKY
VINDICATOR BUSINESS STAFF
YOUNGSTOWN -- Judge William Bodoh expects a rush of personal bankruptcy filings over the next few months as consumers rush to avoid provisions of a tough new federal law.
Congress is finishing hammering out a revised law making it more difficult to wipe out your debt. President Bush has said he will sign it.
"My guess is, we'll see a blizzard of personal bankruptcy filings in the six months before the law takes effect," said Bodoh, of U.S. Bankruptcy Court in Youngstown. "People are going to want to try to get in under the old statutes."
Boardman bankruptcy attorney Bruce Epstein said the changes will leave some debt-ridden consumers with the choice of keeping their home or their car.
What's behind this: Epstein said the new law will make it harder for people to qualify for Chapter 7, which allows them to walk away from their debts.
Lawmakers have added income limits so people with higher incomes will not be able to file under this section of the federal bankruptcy code, he said.
In general, people with enough income to repay 25 percent of their debts over five years would have to pay off part of those debts under a court-approved plan and submit to debt counseling.
Epstein said that changes to that section, known as Chapter 13, will require people to make higher payments to creditors.
One change deals with how people would handle debt from car loans, he said.
If someone has a debt of $9,000 and a car with a market value of $5,000, for example, current law allows the person to make payments that would equal the market value plus a reduced interest on the debt.
The new law would require a payment plan for the full $9,000.
The change could result in fewer bankruptcy filings because people won't have the same benefits. Those people who don't file will have to deal with creditors' pursuing them for years, Epstein said.
Backers of the changes say the issue is about fairness and making people responsible for their actions. They say that abuse of bankruptcy laws costs each American family $400 a year in higher interest rates and other charges.
Epstein said the law results from credit card companies and other businesses who have spent millions lobbying Congress. The real problem is that some people have too much debt, he said.
"There is no problem with the system," he said.
Part of problem: Credit card companies are encouraging debt problems by bombarding people with credit card offers and encouraging young people to spend money they don't have, he said.
Bodoh agreed that credit card issuers deserve a large part of the blame for skyrocketing personal debt, but the changes won't help credit card companies and other credit issuers as much as they had hoped.
What disappoints him most is that necessary changes were not made. "There are parts of the existing law that deserve to be amended, but those have been largely ignored," the judge said.
For example, lawmakers set income limits for Chapter 7 filings, but failed to define how income should be determined.
The new law allows creditors to pry into the debtor's affairs -- they could demand a death prognosis for a critically ill person or to ask that an elderly or mentally retarded person be institutionalized to cut costs.
"Instead of means testing, I think they should call it mean testing," the judge said.
Wayne Sarna, a staff attorney for Northeast Ohio Legal Services in Youngstown, said the bankruptcy changes will be hardest on middle-income people.
"I don't see anything good for the working person," he said. "It seems one-sided on behalf of the creditors."
What's bad news: Sarna said the revisions could hurt people who are buried in debt for reasons beyond their control, such as chronic health problems.
And the middle class are often hardest hit. He said 85 percent to 90 percent of his cases were bankruptcies when he worked for UAW Legal Services at General Motors from 1985 through 2000.
Credit card issuers exerted strong pressure on the legislators to control the outcome of the new legislation, he said.
Amendments were proposed which would have restricted credit card extensions to consumers under age 21 and which would have differentiated medical expenses from credit card bills in devising a payback schedule for debtors. Both amendments were defeated.