by Anthony DeMatteo
Staff Writer
A law enacted in 2005 making it more difficult to file for Chapter 7 bankruptcy protection has personal bankruptcy filings down in Jacksonville, according to local bankruptcy attorney, Chad Dean.
Dean, a lawyer with Schuyler, Stewart and Smith, said after the law passed, a lack of public knowledge kept some people from filing bankruptcy, including Chapter 7, the “fresh start” filing that liquidates assets then forgives the debts of applicants.
“There’s a common misconception out there,” said Dean. “Some people think you can’t file bankruptcy anymore.”
Criteria for Chapter 7 was determined by a judge before the new law introduced a means test to determine how much of his or her debt a person should pay.
In the weeks leading up to the bill’s passage 17 months ago, Chapter 7 filings skyrocketed.
“There aren’t a lot of filings now, it’s slowed down very dramatically since the new law,” said Dean. “But I think that will change.”
Dean said better public awareness of the law and the high number of current foreclosures forecast a spike in filings.
The means testing meant some bankruptcies that might have been Chapter 7’s became Chapter 13’s, in which a debtor enters a payment plan with creditors.
The law also made it harder to file Chapter 7 on credit card debt.
“Say you had $30,000 in credit card debt, and didn’t rack it up in bad faith,” said Dean. “You were likely to be able to file Chapter 7. Now, they look at how much money you make and your debt-to-income ratio.”
Dean, who represents creditors, said the goal of the law was to ensure creditors increased the percentage of debt they collected.
“That’s the idea,” he said. “I don’t know that that’s the case.”
The new law mandates applicants participate in a 90-minute credit counseling session six months before they file for bankruptcy.
It also sets the limit of eligibility for Chapter 7 at the median income of individual states and the ability to pay 25 percent of unsecured debt.
Local bankruptcy attorney Al Mickler, who represents debtors, also said the law has not caused money to flow into creditors’ pockets.
He said the ability of debtors to take deductions from their gross income, including secure debt, has dropped many below the median income filing threshold of their state.
“You can think of it like a tax return,” said Mickler. “People can deduct things such as the cost of cars and health insurance and that often drops them below the number.”
Secured creditors have the right to repossess items for which they are owed payment.
Unsecured creditors, including credit card companies, cannot repossess goods.
“All they can do is sue you,” said Mickler. “I don’t think the law has done anything to benefit unsecured creditors. Here in Duval County, people filing bankruptcy don’t have much money to start off with, so most don’t have a problem falling below the figure.”
Mickler said an issue being litigated is the legitimacy of “cross collateralization clauses” written by credit unions, which can arguably make credit card companies quasi-secured creditors.
As an example, he said that if put into practice, the clauses could attach a truck as collateral to a debt incurred at Disney World if the credit union involved in both debts was the same.
Connecticut bankruptcy attorney Myles Alderman, who authored a book on business bankruptcy law, said though it is too early to judge the impact of the 2005 law, he is not banking on a boon for creditors.
“I would be surprised if at the end of a year creditors reported a huge change because of the change in legislation,” he said.
He said the law did not effect business nearly as much as individuals, but included changes that improved small business reorganization rules.
Alderman said though the great majority of those filing bankruptcy before the new law were not taking advantage of the system, it is now harder to commit fraud when liquidating assets.
“The revised statute will do a good job of stopping those who “gamed” the system,” said Alderman. “Those folks are going to be affected most by the means testing. Those who need to file will still have that ability.”