The far-reaching bankruptcy bill signed by President Bush on Wednesday could prompt many attorneys to stop handling bankruptcy cases, two local attorneys said.
The law also will make it tougher and more costly for consumers to obtain relief from creditors, according to bankruptcy attorneys Mary Stockman, who has offices in Scottsdale and Phoenix, and Anthony Clark, who has offices in Mesa and Phoenix.
"I don’t even know if I’m going to continue to file bankruptcy petitions for people," Stockman said.
"A lot of attorneys who are filing now, I think their insurance carriers will drop them if they file bankruptcy."
The bill is expected to limit the number of Chapter 7 filings versus Chapter 13 filings. In Arizona and the Valley, most consumers continue to file Chapter 7, which is strictly liquidation, as opposed to Chapter 13, which includes at least some repayment.
The bill will reform a system that allows too many people to wipe out debts they could have repaid, said Laura Fisher of the American Bankers Association.
"There will be a more standardized process in place so that the courts can determine who deserves full, 100 percent wipeout of all their debts and who really deserves a more moderate level of bankruptcy protection where there is some repayment involved," she said.
Stockman said 70 percent to 80 percent of her clients would no longer quality for Chapter 7 bankruptcy if the bill’s eligibility criteria was effective immediately. Those restrictions will take effect Oct. 20.
"It will force a substantial portion of people into Chapter 13, and then the guidelines are going to be so strict that even a Chapter 13 isn’t going to be as feasible for people as it used to be," she said.
Clark said he expects to see more traffic in his offices during the next six months and has already noticed more people seeking bankruptcy protection since the legislation was passed last week.
"In my office, I usually file something like 85 to 90 cases a month, but in the last week my office has filed over 100 cases," he said. "The impetus for that is the concern that some provisions of this bill are immediately effective."
The American Bankruptcy Institute projects that one out of five people who could file for Chapter 7 today will be ineligible to do so in six months, Clark said.
"We estimate roughly 5 percent of filers who in the past would have gone into Chapter 7 are now going to go into Chapter 13," Fisher said.
The median income test in the bill will still allow 80 percent of those seeking bankruptcy protection to file Chapter 7, she said. Of the remaining 20 percent, only 10 percent would have any money left over to possibly repay any debt, she said.
In addition, filers will be able to present evidence in court as to why they should be allowed Chapter 7 liquidation, Fisher said.
Attorneys will be facing higher administrative costs that will be passed onto filers, Stockman said. For example, a costly court appearance will be required for debtors who want to keep assets such as a home or vehicle, and agree to continue meeting those financial obligations, she said.
According to the bill, if the debtor failed to meet those financial obligations, the debtor’s attorney may be liable for that debt, she said.
"That means you’re adding anywhere from $500 to $1,000 in costs to every single bankruptcy proceeding where people just own a vehicle,"
The legislation also would require attorneys to perform additional due-diligence to determine all of a debtor’s financial assets, she said.
"Due diligence isn’t cheap," Stockman said. "I can question them, they can fill out things and I can say well, this doesn’t look like this, but I can’t take years of records and go through them without charging for that time. The time would be astronomical."
The legislation also would make attorneys liable if debtors failed to disclose assets, she said.
Also, the maximum extent that a debtor’s prior financial conduct is relevant in a case is will be extended from four to 10 years, Clark said.