U.S. Senate passes bankruptcy bill

A bill passed in the U.S. Senate Thursday will make it more difficult and expensive for people in debt to declare bankruptcy, and make attorneys more hesitant to take on bankruptcy cases, local bankruptcy lawyers said.

Most individuals filing bankruptcy do so under either Chapter 7 or Chapter 13. Under Chapter 7, some assets are liquidated with the proceeds going to creditors, but many remaining debts are canceled, giving the filer a chance to start over with a clean sheet.

In a Chapter 13 bankruptcy, a person is more likely to be able to pay down his or her debts, but is put on a repayment plan that lasts up to five years.

Under the reform, tighter qualifying standards will allow fewer people to erase their debts through a Chapter 7 filing and force more people to file Chapter 13 and work on repayments. Rather than allow the court to decide, as it does today, whether a person qualifies for Chapter 7, each filer is subject to a means test. Anyone with income above the state's median and deemed capable of paying off a percentage of their debt will be unable to file Chapter 7.

"The calculation of whether you come under the means test will have to be done by everybody," said Clifton Caughron, a Helena bankruptcy attorney in Helena. "That means another set of forms that goes with the schedules and statements we already prepare, which will have the effect of making the petition more expensive."

A typical bankruptcy filing today costs anywhere from $500 to $1,000, but the reforms would likely push the expense to a $1,000 minimum, Caughron said.

The bill also shifts some liability onto the attorney handling the case, putting the onus on the lawyer to be certain that clients qualify for the type of bankrutpcy they're seeking.

"If the trustee's office makes a motion to convert a 7 to a 13 and it's granted, the attorney is liable for the fees associated with that transfer, along with a possible civil penalty," said Charles Smith, another Helena lawyer with 40 years of bankruptcy experience. "This will reduce the number of attorneys willing to take the risk."

Caughron said that with the reform, attorneys will be liable if clients aren't truthful about their assets or other circumstances. It will cost more, he said, to verify all the information he's given.

"Lawyers are going to have to certify the accuracy of their clients' schedules," he said. "Right now we just take our clients' word for it."

The means testing is meant to drive people who make more than the state's median income to file Chapter 13 and come up with a plan to repay their debts.

"The presumption is that they have existing income with which they can pay their creditors," said Bernard McCarthy, Clerk of Court for the U.S. Bankruptcy Court District of Montana in Butte.

But Smith said that many people who make the median income in Montana still struggle to make ends meet, particularly if they've been hurt or laid off and have a family to feed and shelter.

Of the 4,376 bankruptcies filed in Montana in the 12 months ended last September, 3,897 were Chapter 7 and 456 were Chapter 13. Nationally in the same period there were 1.1 million Chapter 7 filings and some 450,000 under Chapter 13.

The legislation, which has been in the works for several years and nearly passed in 2002, is backed by credit card companies, banks and retailers, hoping to force more people who owe money to repay at least some of their debts.

Supporters argue that bankruptcy frequently is the last refuge of gamblers, impulsive shoppers, divorced or separated fathers avoiding child support and multimillionaires — often celebrities — who buy mansions in states with liberal homestead exemptions to shelter assets from creditors.

Opponents say the burden of the new laws will fall primarily on low-income workers, single mothers, minorities and the elderly and would remove a safety net for those who have lost their jobs or face big medical bills.

"I think it's an anti-consumer law," Smith said. "Most of the people I handle bankruptcies for are truly poor people. They aren't trying to beat the system, they just can't make it."

After passing the Senate, the bill is expected to sail through the House and be signed by President Bush.

The Associated Press contributed to this report.

John Harrington can be reached at 447-4080 or john.harrington@helenair.com.