Filers try to beat laws

The new regulations affect Chapter 7, mostly.
By ED RUNYAN
VINDICATOR STAFF WRITER
YOUNGSTOWN -- Changes in federal bankruptcy laws enacted in April will have one sure effect for the next three weeks: The federal courthouse in Youngstown where bankruptcies are filed will be a busy place.
The lawyers who handle these claims will be busy meeting the needs of last-minute filers to get their cases on the docket before the Oct. 17 deadline for most provisions of the new laws to take effect.
"The place is packed," said Atty. Robert Melnick of Youngstown. He said the new laws will make it tougher for some debtors to file for Chapter 7 bankruptcy -- the so-called "clean slate" bankruptcy -- so there are those who would like to file under the current laws, he said.
Spike in September
Local bankruptcy attorney Robert Ciotola said he saw the biggest spike in cases this month. "It seemed like everybody has waited until September," he said.
Statistics from the U.S. Bankruptcy Court Northern District show bankruptcies have risen in the months since April.
Chapter 7 bankruptcy filings climbed dramatically in the district, which covers courts in Toledo, Cleveland, Akron, Youngstown and Canton. These bankruptcy filings increased 26 percent for the five-month period of April through August, when compared with that same period in 2004. In the Youngstown district, they rose 30 percent.
Chapter 13 bankruptcies -- in which a debtor has between three and five years to pay back much of his debt -- increased 6 percent during that period in the Northern District and 2 percent in the Youngstown district.
According to experts, Chapter 13 bankruptcies are not affected as much by the new laws as Chapter 7. In fact, many say the law is intended to force debtors to file for Chapter 13 instead of Chapter 7 so they can repay their debts.
Chapter 11 bankruptcies -- the kind used by businesses -- also rose in that period: 65 percent in the Northern District and 55 percent in the Youngstown district, statistics show.
Bankruptcies of all kinds rose 46 percent in August, compared with the same month in 2004 in the Northern District. For the entire year of 2004, compared with 2003, all of these cases were down 2 percent.
Michael Gallo of Nadler, Nadler and Burdman of Youngstown, who has handled many high-profile bankruptcy cases in Mahoning County such as Phar-Mor's Chapter 11, said he believes relatively few of the people in the area served by the Youngstown Bankruptcy Court are the kind the law was designed to stop.
Erasing debts
Gallo said the stated reason why Congress made it harder to file Chapter 7 bankruptcies was to prevent people with a lot of money from being able to use bankruptcy to erase debts they could have paid back to creditors.
He said he saw a television program showing a doctor driving expensive cars and making more than $100,000 a year filing for bankruptcy under Chapter 7 and walking away from credit card debts. That is the type of abuse the law is supposed to stop, he said.
Gallo estimated those types of bankruptcies here make up between 5 percent and 15 percent of the total. "In maybe 90 percent of the cases, people are pretty down and out," he said.
Part of the new law is a test to indicate whether the filer has an income above the median for the area where they live. He says most of his current bankruptcy clients are not above that median income and so they can probably still file a Chapter 7 under the new laws.
That doesn't mean, however, that filing will be easy. The new laws do make filing more difficult and more expensive, which will add to the costs paid by clients, Gallo said.
What may be driving the last-minute rush to file, more than anything, he said, is fear of the unknown.
"It's not so much 'I'm trying to bilk my creditors,' but more 'Let's file now while I'm in familiar territory, while it's a little easier,'" Gallo said of lawyers and clients.
Commercial bankruptcies
Gallo said commercial bankruptcies under Chapter 11 won't be affected much by the new law. One change is that there are now limits on the amount company executives can earn as a bonus for emerging from bankruptcy protection. The bonuses will be limited to a percentage of the executive's salary, he said.
Ciotola said the new law imposes "hoops that are jumpable," though more expensive. Now, Chapter 7 filers have to go to a class and submit more documents.
"If you say you make $70,000 [per year], I can't file for bankruptcy for you," Ciotolo said.
"That person, I put into a repayment plan and he pays his debts over time."
Melnick predicted that the bigger impact of the law will be in people's attitudes about using credit cards carelessly sometime after the Oct.17 deadline.
"I will make a prediction. By the holidays of 2006, when people understand they can't use credit cards so much, you'll see a change in attitude. It will definitely have a chilling effect," he said.
runyan@vindy.com