The Bankruptcy Boom
In mid-February, the telephones in Jack Prescott's New Brighton office began ringing off the hook. "I'd guess we received 800-plus calls over the four weeks," notes Prescott, the "It's all I do and I do it well" bankruptcy attorney of TV fame. In a more typical month, Prescott says, his office receives about 400 calls. While the bankruptcy business is prone to up-and-down cycles, Prescott and partner Dick Pearson thought this spike was unusual.
It was. As it turned out, more Minnesotans sought bankruptcy protection in March than in any month in history. The 2,038 cases filed constituted a roughly 25 percent increase over March 2000. Nationally, filings increased by about the same margin, according to a study released in April by the brokerage house Merrill Lynch.
Not coincidentally, the stampede came just as the U.S. Senate and House overwhelmingly passed separate but similar bills calling for a massive, creditor-friendly overhaul of the federal bankruptcy code. With more than 400 pages of proposed changes, the new rules will make it more difficult for people to file Chapter 7 protection. In the most common form of personal bankruptcy, Chapter 7, some of a debtor's assets are sold, the proceeds divided among creditors, and the remaining debt dissolved. The debtor is generally allowed to retain a home and a car; in most cases, an individual's other assets don't come near to meeting the total debt.
Under the proposed Bankruptcy Reform Act, however, many Chapter 7 filers will be directed into Chapter 13 bankruptcy, a more complex proceeding in which debtors make regular payments, for up to five years, to their creditors.
In the view of its supporters, the bill--which still must make its way through conference committee before President Bush can sign it into law--will put an end to the abuses of the current system, which, they contend, allows free-spending deadbeats off the hook.
"This bill targets the guy who goes out on a spending spree, then files a Chapter 7 and gets to walk away from his debt scot-free. That's the main intent," says Tom Lehner, a government-affairs specialist with the American Financial Services Association, a D.C.-based creditor lobby. In the past two decades, Lehner notes, bankruptcy filings have swelled by some 300 percent. "It has just turned into a way for people to write off their debts," he says. "The problem is that the rest is passed on to the other consumers in the form of higher interest."
But bankruptcy attorneys and other advocates for debtors argue that profligate spending is not the root cause of most bankruptcies. So does Robert Kressel, a judge in the U.S. Bankruptcy Court in Minneapolis. Kressel has been a judge since 1982, and in that time he's witnessed very few flagrant abuses of the system. "I don't see much of it, and I don't talk to any judges who see much of it," Kressel notes. "From my perspective, the current system is working perfectly well."
Maureen Thompson, a spokeswoman for the National Association of Bankruptcy Attorneys, says that recent academic analyses typically link bankruptcy filings to garden-variety personal crises; high medical bills, unexpected job loss, divorce, and the like. Because credit-card companies are quick to issue cards, she adds, many people make the mistake of trying to tide themselves over by putting their bills on plastic. "The vast majority are not, as the credit-card companies would have you believe, yuppies spending extravagantly and then waking up one morning and deciding they don't want to have to pay their bills," she insists.
Attorney Pearson concurs. It's a scenario he says he sees replayed every day: Working-class folks use their credit cards as a short-term solution to a financial crisis, only to find themselves mired in a cycle of making minimum payments and, often, taking out new cards to pay off the balances on the old ones. "We get people in our office who file for bankruptcy and 30 days later come back for a hearing with two or three pre-approved credit cards," Pearson says.
Critics across the political spectrum have been quick to denounce the proposed Bankruptcy Reform Act as bought legislation. "You know what this bill is," says Prescott. "The poster child for campaign-finance reform."
According to the Center for Responsive Politics, a Washington, D.C.-based nonprofit, the financial-services industry spent an estimated $50 million on campaign contributions and lobbying in the past election cycle.
Still, most insiders regard its final passage as all but inevitable. Last year, a similar version of the bill passed both the Senate and the House, only to be vetoed by then-President Bill Clinton. This year, with the support of President George W. Bush, the bills passed by even larger margins: 83-15 in the Senate; 306-108 in the House.
For bankruptcy practitioners like Prescott and Pearson, the short-term effect of the looming reform has been good for business. Like other bankruptcy lawyers, they've even used the prospect of the new law as a hook in their advertisements, urging people to file before the new rules go into effect. In the long term, however, the change in the law will likely make their jobs more complex and their services more expensive for clients. These days, Prescott says, he typically charges about $700 to handle a Chapter 7 filing, the simplest type of bankruptcy. That, he says, will probably change under the law. "We think it's gonna damn near double the cost," he predicts, adding that the cost of handling the more involved Chapter 13 cases is also likely to rise.
While the bill's defenders contend that safeguards will keep the truly vulnerable from being stuck in an endless cycle of debt, critics like Maureen Thompson remain skeptical. She notes that additional paperwork requirements are likely to create problems for the poorest debtors. "There are going to be a lot more pressure points for creditors to challenge you, and if you don't have the money to hire a lawyer to defend you in court, what are your options? " she asks. "What are you going to do? You're going to go underground and work off the books, so nobody can garnish your wages. It's not going to be pretty."
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