VOL. 121 | NO. 50 | Thursday, March 2, 2006
Is New Bankruptcy Law Counterproductive?
By Andy Meek
REVIEWING THE FILES: Tim Moore and Jacqueline Oselen, counselors at the nonprofit Kingdom Ministries Inc. in Cordova, look through debtor files before opening the floodgates to clients on a recent morning. Debtors are required to get counseling under a federal bankruptcy law that went into effect in October. -- Photograph By Andy Meek
For the past few months, Betty Jones-King has faced a daunting task.
Her small credit counseling office in Midtown, 2nd Chance Budget & Debt Family Counseling Services, was the only Memphis agency approved by the U.S. Trustee's Office to offer debtor counseling.
The counseling is required by the new federal bankruptcy law that was enacted April 20 and went into effect in October. Anyone considering bankruptcy must go through it before they can trudge to the courthouse for a financial fresh start.
But in recent weeks, two other local counseling agencies got the green light to offer that service. Kingdom Ministries Inc. at 98 Timber Creek Drive in Cordova and the Memphis Housing Resource Center on Poplar Avenue now can take some of that burden off Jones-King.
"I have a passion for what I do - I just didn't think I was going to be the only one doing it," she said.
Long day's journey
At one point, Jones-King was counseling eight debtors a day. Sessions lasted 90 minutes, and her workday often stretched until 8 p.m.
To put her problem in perspective, consider that, before the law was enacted, more than 20,000 cases each year moved through bankruptcy courtrooms in the Western District of Tennessee, which includes Memphis and Jackson. That's roughly comparable to a sold-out crowd for a Memphis Grizzlies game filing for bankruptcy every year.
With counseling options for local debtors Memphis now beginning to multiply, it might be a good a time to ask perhaps the most important question about the landmark legislation, which took effect Oct. 17: Is it working?
Crime and time
"The new law certainly seems to be 'working' in that it has made the bankruptcy process much more difficult for abusive filers. Unfortunately, I believe it may also be more difficult for the honest debtor, as well. The volume of cases, in general, has decreased dramatically."
- Blair Evans
Attorney at Baker, Donelson, Bearman, Caldwell & Berkowitz PC
Because it's now more expensive and rigorous to file for bankruptcy, critics claim the law "comforts the comfortable and afflicts the afflicted," according to Newsweek. The bill's title - the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 - suggests it was meant to be about personal accountability, even though Congress scuttled several significant amendments to the bill.
For example, an amendment that would have protected anyone declaring bankruptcy because of huge medical expenses failed. So did one capping interest at 30 percent.
And now, a report released this month by the National Association of Consumer Bankruptcy Attorneys suggests the new law actually is hampering people who need to file.
Financial deadbeats who have taken on debt they can't afford are getting the same treatment as debtors whose finances have been stung by job loss, medical bills or other catastrophes, according to the NACBA.
"The new law certainly seems to be 'working' in that it has made the bankruptcy process much more difficult for abusive filers," said Blair Evans, an attorney with the Memphis firm Baker, Donelson, Bearman, Caldwell & Berkowitz PC. "Unfortunately, I believe it may also be more difficult for the honest debtor, as well. The volume of cases, in general, has decreased dramatically.
"I've spoken with a great number of debtors' attorneys who have yet to file a case under the new act."
A time for foot-dragging
Evans said the new law has kept the occasional debtors' attorney - say, one who files one to five cases each month - out of court altogether. One of the law's stated goals was to push more debtors into filing Chapter 13 bankruptcy, which means the court would order them to follow a debt repayment plan.
Under Chapter 7, much of their debt is written off.
But what does it say about the new legislation, some observers have wondered, when in the so-called bankruptcy capital of the country, most debtors already were paying back much of what they owed?
That's one reason retiring bankruptcy judge William Houston Brown wonders if Congress might revisit the bill soon.
"We continue to get mostly (Chapter) 13 cases here, as we did before," he said.
Most bankruptcy filers aren't spendthrifts, according to the NACBA. In its report, the group surveyed six major credit counseling agencies that have provided the required counseling to more than 61,000 debtors since October.
Almost 97 percent of those surveyed could not afford a debt management plan instead of bankruptcy. And most of the remaining 3 percent needed bankruptcy protection to stave off problems like foreclosure.
Any counseling will do
Among the new law's most significant changes is the requirement that debtors attend a credit counseling session. That must be done before they file bankruptcy; debt management counseling must be completed by the end of the process.
In Memphis, only three agencies have a physical location for counseling debtors. A handful of out-of-state options allow debtors to call in for the mandatory session or chat over the Internet, but judges and bankruptcy professionals are wary of those options.
"I can't counsel on the telephone or the Internet," said Tim Moore, one of the counselors at Kingdom Ministries in Cordova. "But I can if I'm looking at their paperwork, they're looking at me and we're talking about the situation."
All things considered, Saralyn Williams Crowell, program coordinator for the MemphisDEBT Collaborative, said mixed feelings persist about the new law's local impact.
"Is it working? I guess that's more of a question for the court system," she said. "But I haven't talked to anyone yet who thinks it's a very consumer-friendly bill. I think, like with all laws, what was originally envisioned and what actually came out of the works was not the same thing."