"debt-ridden rushing to file before deadline"

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    Debt-ridden rushing to file before deadline
    Kathleen Pender

    Sunday, October 2, 2005

    There has been a stampede to the courthouse as debtors rush to file for bankruptcy before a new federal law takes effect Oct. 17.

    The new law, a decade in the making, will make it more complicated and expensive for individuals to file for Chapter 7 and Chapter 13 bankruptcy. Whether it prevents or dissuades people from erasing or reducing their debts via bankruptcy remains to be seen.

    Under the new law, people who make less than the median income for their state can usually file for Chapter 7 bankruptcy.

    Chapter 7 essentially wipes out a person's debt, although creditors can seize his or her assets, except for those that are either exempt or outside the bankruptcy estate. People with no significant assets generally prefer Chapter 7.

    The new law requires those who make more than the median income to take a means test to see if they could theoretically repay at least $6,000 in debt over five years, or $100 a month. If the test shows they can't repay that amount, they can still file for Chapter 7.

    If the test shows they can pay that amount, they generally must file for Chapter 13, although there are some exceptions. Chapter 13 requires debtors to repay secured debt (such as a house or car) and a percentage of unsecured debt (such as credit cards).

    The advantage of Chapter 13 is that debtors can keep their assets if they complete the repayment plan, and the black mark stays on their credit history for seven years, compared with 10 years for Chapter 7.

    Under the new law, bankruptcy lawyers become responsible for making sure their clients fill out the means test properly or risk being sued.

    Attorneys are likely to increase their fees to cover the added paperwork and responsibility.

    Today, attorneys on average charge about $1,000 in cities and $700 to $800 in rural areas to file bankruptcies, says Steve Elias, author of "The New Bankruptcy: What It Will Do for You," from Nolo Press.

    "That's going to double," Elias predicts.

    The new law also requires debtors to receive bankruptcy counseling from an approved agency before filing Chapter 7 or 13 and take a two-hour personal finance class -- akin to traffic school -- afterward.

    Jump in cases

    Like most U.S. bankruptcy courts, the one for Northern California, in San Francisco, has been inundated with cases. Its Chapter 7 filings increased 32 percent in August and 125 percent in September from the same months last year.

    Chapter 13 filings dipped a bit in August but rose 24 percent in September compared with the same months last year.

    The new law takes effect at 12:01 a.m. on Monday, Oct. 17.

    In San Francisco, attorneys can file cases electronically until midnight on Sunday, Oct. 16.

    Individuals can file in person until 4:30 p.m. on Friday, Oct. 14.

    Bankruptcy law is federal, so the changes will affect most Americans the same way. The main thing that varies by state is the type and amount of assets that are exempt, or can't be seized by creditors in bankruptcy.

    Florida, Texas, Kansas, Iowa, South Dakota and the District of Columbia have unlimited homestead exemptions, which have allowed some wealthy people to shield millions of dollars from creditors by buying or building mansions in those states, even if they didn't live there previously.

    The new law limits the homestead exemption to $125,000 if a debtor bought his or her residence fewer than three years and four months before filing.

    In California, the homestead exemption remains at $50,000 for individuals, $75,000 for married couples and $150,000 for people older than 65 or older than 55 and disabled.

    "If your home equity is more than the homestead exemption, they can take your house, sell it and give you the exemption amount," says Elias.

    Under the old and new laws, most retirement assets, such as 401(k) plans and Individual Retirement Accounts, are outside the bankruptcy estate, which also shelters them from creditors. On the plus side for consumers, the new law moves annuities and college savings accounts outside the estate.

    Means testing

    The most vexing part of the new law is the means test.

    Under current law, to qualify for Chapter 7, a debtor cannot have more income than expenses. The outcome varies "case by case, judge by judge," Elias says. If the judge determines the debtor can afford to repay his debts, the judge will put the debtor into Chapter 13 and impose a partial repayment plan.

    The new law imposes strict rules. First, the court will look at the debtor's income from the previous six months.

    If the debtor had a job for the first five months, then lost it, the income for the first five months will be counted, even though he or she is now unemployed. Conversely, if debtors were unemployed for five months, then got a job, they will get the "benefit" of having been unemployed for most of that time. This will make the timing of bankruptcy filings crucial for some.

    The debtors' income, extrapolated over a year, is then compared with the median annual income for their state.

    The median in California ranges from $42,012 for a single wage earner to $68,310 for a family of four (plus $6,300 for each additional person). Fourteen states, including Virginia, Michigan and Illinois, have higher median incomes for a family of four.

    If the debtor's income is less than the median, he can file for Chapter 7. If it is more, he must take the means test.

    The means test looks at his income and what are considered reasonable expenses. These expenses are based on national, regional and local averages. They are not based on his actual expenses, with a few exceptions, such as child care and taxes.

    If the means test shows debtors can't afford to pay at least $100 a month to creditors, they can file for Chapter 7.

    If it shows they can pay that, they have to do further testing, which can get quite complicated. In the end, they may still qualify for Chapter 7, or they may be forced into Chapter 13, says Elias.

    Some debtors will continue to prefer Chapter 13, especially those with home equity above the homestead exemption.

    "You normally file 13 to keep your house out of foreclosure," says Rick Harper, director of housing with the Consumer Credit Counseling Service of San Francisco.

    "Say you are five months behind on your mortgage payment, and the lender will not take partial payments. You can say, 'I will make my normal payment plus 1/ 36th of my arrearage a month over three years.' The lender is forced to accept that if the court approves it," Harper says.

    Effect on filings

    Proprietary research by Best Case Solutions, which provides bankruptcy software for lawyers, suggests that more than 85 percent of current Chapter 7 filers have income that will fall below their state medians, qualifying them for Chapter 7 under the new law.

    Of the remaining 15 percent, some will be able to file Chapter 7, and others will have to file 13.

    Some experts suspect that the percentage of people filing for each type of bankruptcy won't change much, although the new law may discourage some people from filing at all.

    "The bill was not designed to move people into Chapter 13 repayment plans. It was designed to keep people out of bankruptcy altogether," says Randall Newsome, chief judge of the U.S. Bankruptcy Court for Northern California.

    "It will be hard to get relief, and if you make a mistake, you are probably going to have a hard time getting back into the system. There are at least six new forms that every filer is going to have to file," he says.

    Proponents of the law said they wanted to go after people who abuse the bankruptcy process, but "the cheating ratio is 5 percent, max," Newsome says.

    Studies show that 3 to 5 percent of filers game the system by filing for bankruptcy, then doing nothing. The filing stays or temporarily halts creditors from collection, foreclosure and repossession.

    When the stay expires, they file again, and again.

    "If you keep doing this, you can stay in your apartment or house ad infinitum just by paying a filing fee," Newsome says.

    The new bill "puts limits on the automatic stay if you are a repeat filer. But it probably won't solve the problem, because it won't clarify the lender's rights," he adds.

    The new law also lengthens the amount of time one must wait between bankruptcy filings to eight years for Chapter 7, two years for Chapter 13 and four years between a Chapter 7 and a Chapter 13 case.


    The doomsayer Bob Dylan, in 1979, wrote/sang -

    Sometimes I feel so low-down and disgusted
    Can't help but wonder what's happenin' to my companions,
    Are they lost or are they found, have they counted the cost it'll take to bring
    All their earthly principles they're gonna have to abandon?
    There's a slow, slow train comin' up around the bend.

    I had a woman down in Alabama,
    She was a backwoods girl, but she sure was realistic,
    She said, "Boy, without a doubt, have to quit your mess and straighten out,
    You could die down here, be just another accident statistic."
    There's a slow, slow train comin' up around the bend.

    All that foreign oil controlling American soil,
    Look around you, it's just bound to make you embarrassed.
    Sheiks walkin' around like kings, wearing fancy jewels and nose rings,
    Deciding America's future from Amsterdam and to Paris
    And there's a slow, slow train comin' up around the bend.

    Man's ego is inflated, his laws are outdated, they don't apply no more,
    You can't rely no more to be standin' around waitin'
    In the home of the brave, Jefferson turnin' over in his grave,
    Fools glorifying themselves, trying to manipulate Satan
    And there's a slow, slow train comin' up around the bend.

    Big-time negotiators, false healers and woman haters,
    Masters of the bluff and masters of the proposition
    But the enemy I see wears a cloak of decency,
    All non-believers and men stealers talkin' in the name of religion
    And there's a slow, slow train comin' up around the bend.

    People starving and thirsting, grain elevators are bursting
    Oh, you know it costs more to store the food than it do to give it.
    They say lose your inhibitions, follow your own ambitions,
    They talk about a life of brotherly love, show me someone who knows how to
    live it. There's a slow, slow train comin' up around the bend.

    Well, my baby went to Illinois with some bad-talkin' boy she could destroy
    A real suicide case, but there was nothin' I could do to stop it,
    I don't care about economy, I don't care about astronomy
    But it sure do bother me to see my loved ones turning into puppets,
    There's a slow, slow train comin' up around the bend.

    buy some silver, eh.


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