October 05, 2005

YBK [Part 23]: What was foreseen back on June 1 has come to pass. From today's Washington Post:
Two weeks before a new, more restrictive national bankruptcy law goes into effect, financially strapped Americans are rushing to file for protection from their creditors, with filings climbing to an unprecedented average of 13,000 a day last week.

Week after week records are toppled. Last week's 68,287 filings surpassed the record set the week before by 24 percent, and this week's total is likely to be higher, according to data released yesterday by Lundquist Consulting Inc., a financial research firm. Daily filings averaged 10,367 in September, compared with an average of 6,079 in September 2004.

The surge is in anticipation of the new bankruptcy law, long sought by the financial industry, which takes effect Oct. 17. The law will make it harder and more expensive for people to completely wipe out their debts under Chapter 7 bankruptcy.

"We are seeing a rush, mainly from people we saw a year ago," Northern Virginia bankruptcy lawyer Robert Weed said. A year ago his clients thought they would be able to work their way out of debt without filing for bankruptcy, he said, "but now they're in a panic to get in before the law is changed."

That is what prompted Samantha Gordon, 28, of Woodbridge to file. "I was putting it off and putting it off," the single mother of three said. Gordon, a patient-care coordinator, said she kept hoping to pay off her debts, but every time she had thought she was close, "a new bill, mostly medical, came up." She decided to take action after her father alerted her about the new law.
Along with using the "P-word" (as in "panic"), the Post did report some good news today: the office of the U.S. Trustee, the branch of the Justice Department that administers the Bankruptcy Court, agreed to temporarily waive enforcement of the provisions of the new law that mandate credit counseling to residents in Louisiana and the Southern District in Mississippi due to this season's hurricanes. Since none of the approved credit counseling agencies is physically located in the state (in fact, the new law specifically permits "credit counseling" to be done over the internet), this may have been done, as Prof. Robert Lawless suggests, to alleviate some of the pressure now on Congress to suspend the effective date of the bill by tossing a bone to hurricane survivors.

In the meantime, other provisions of the new law are set to further the devastation started by the Furies named Rita and Katrina. With homes and businesses still underwater, the local courts out of operation, trained professionals in the bankruptcy field having to relocate their offices, and the paperwork necessary under the new law now part of the debris rimming the Gulf Coast, victims of the storms are now placed in a predicament. Without any time to prepare for the traumatic experience of filing a bankruptcy petition (most of my clients struggle through their debts for years before finally succumbing to the inevitable), and now without the means of proving hardship that Congress, in its infinite wisdom, demanded when it passed the Bankruptcy Reform Act last spring, residents of the Gulf Coast now have nine days to decide whether to take this step, or risk the onerous provisions when the Bankruptcy Code changes on October 17.

Proponents of the new law point to 11 U.S.C. §707(b)(2)(B), which states that "...the presumption of abuse may only be rebutted by demonstrating special circumstances, such as a serious medical condition or a call or order to active duty in the Armed Forces, to the extent such special circumstances that justify additional expenses or adjustments of current monthly income for which there is no reasonable alternative." Thus, the argument goes, all a filer will have to do is explain to the judge that Hurricane Katrina destroyed his home, removed his livelihood, and all will be hunky-dory in the end. Former Bush Administration appointee Todd Zywicki observes:
The legislation simply requires high-income filers who can repay some or all of their debts to do so as a condition for filing bankruptcy. If a person has lost his job and income because of the hurricane, then the legislation permits that person to file bankruptcy just like under the current rules. The means-testing provisions of the legislation specifically allow for "special circumstances" that mean that those provisions of the legislation should not apply to a given bankruptcy filer--clearly the destruction of a person's house and job easily fit within those provisions of the legislation.
Assuming that a debtor, defined by Prof. Zywicki as being "upper income" because he earns over the median income for his state, which in Louisiana was $35,523 per year last year, will be able to retain a lawyer, dredge up the tax returns and credit card invoices and submit the proper paperwork that will be necessary to prove "special circumstances", there remains one tiny problem: Congress already explicitly rejected an attempt to include natural disasters, such as hurricanes, tornadoes and earthquakes, as "special circumstances". As Professor Elizabeth Warren points out,
Indeed, the "special circumstances" provision doesn't come close to doing the work the Congressman claims. In one of the many ironies that mark the amendments to the bankruptcy bill, any adjustment requires additional documentation, and, for those whose papers are somewhere in the Gulf of Mexico, the plain language of the statute seems to provide no relief. For hundreds of other blows inflicted by the bankruptcy amendments, such as the increased rights of landlords to toss out tenants or the new risks facing someone who has drawn down a cash advance on a credit card, there is no pretense of relief of any kind....
Of course, there are some judges who will gladly rule that Hurricane Katrina is a "special circumstance"; as I pointed out back in March, there will be judges who will pretty much carve out a "special circumstances" exception to any vicissitude of life, while other judges will limit themselves to the examples specifically enumerated in the statute (ie., "a serious medical condition" or "order to active duty"). The fact that Congress voted down an attempt to include natural disasters as an enumerated exception will be a powerful aid to those judges who are willing to follow the more draconian course; it may be years before any of the appellate courts has a chance to spell out what the provision means, and provide some degree of consistency in how it is interpreted. In the meantime, without Congressional intervention at this late stage, we are set to witness pandemonium the likes of which haven't been seen in the federal courts in our nation's history, all of which will create many losers, but only one small class of winners: Lawyers. Special circumstances? Laissez les bons temps rouler !!

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