Bankruptcy reforms

For several years, the lending industry has been pressuring Congress to overhaul the bankruptcy laws to make them friendlier to creditors. While Congress passed bankruptcy bills aimed at this goal, President Clinton vetoed them because he believed they were too harsh on debtors. Now that George Bush is president, these bankruptcy reforms are almost certain to become law this year.

These changes will have a serious impact upon consumer bankruptcies. Under current laws, consumers usually choose to eliminate debts under Chapter 7 or Chapter 13 of the bankruptcy code. Once the court grants the debtor relief, creditors cannot try to collect debts incurred before the bankruptcy was filed. While some kinds of debt cannot be eliminated (for example, many kinds of taxes), the court’s order will bar creditors from collecting debts for general extensions of credit.

Under Chapter 7, a debtor is usually granted relief from debts within a matter of months. The debtor is protected to a certain value in a home, a car, furniture, and other basic necessities of life. These are referred to as exempt assets. If the debtor has anything of value beyond these exempt assets, the non-exempt assets will be sold, and the proceeds distributed to creditors. If the debtor has only exempt assets, the creditors receive nothing.

Chapter 13 is for debtors who have regular income. The debtor must have enough income after paying living expenses each month to pay money into a plan. The money from the plan is paid out to creditors over a term of three to five years. At the end of this term, the debtor is relieved from most kinds of debt. A Chapter 13 debtor is relieved from a broader range of debts than is a Chapter 7 debtor. A debtor can file under Chapter 13 to save a home from foreclosure, and this is a common reason for choosing Chapter 13. Also, under Chapter 13, debt on items like cars can be reduced to the value of the item, and paid down through the plan.

The new bankruptcy laws would make it more difficult for certain debtors to file under Chapter 7, while making Chapter 13 less attractive to many debtors. They would likely force debtors to undergo credit counseling before filing. Under the present laws, alimony and support obligations generally survive bankruptcy, while obligations for property divisions following divorce may be eliminated by the bankruptcy proceedings. Under the new laws, debts for property divisions will also generally survive bankruptcy.

Filing under Chapter 7 will be a much more complicated process, and debtors who file under Chapter 7 may be subject to penalties if the law indicates that that they should have filed under Chapter 13. Debtors in Chapter 13 will likely have to pay more to creditors on car loans. Chapter 13 debtors may also find it more difficult to keep homes that were in foreclosure proceedings before bankruptcy. These are only some of the changes that are likely.

The bankruptcy reform legislation will probably take effect in the fall of 2001. Given the complications and time it will take to prepare petitions under the new law, those who file for bankruptcy protection after the new laws take effect should not be surprised by a rise in attorney fees for preparation of the petition.

Jon Haddow is an attorney in Bangor with the firm of Farrell, Rosenblatt & Russell, where he specializes in litigation, immigration and bankruptcy.