It May Be Now or Never If You Want to File Personal Bankruptcy
Los Angeles attorney J. Scott Bovitz has a bit of advice for people who are seriously considering filing for bankruptcy: Do it now.
Congress is trying to put the finishing touches on a bankruptcy reform bill that could make it much more difficult for consumers to get out from under their debts. The legislation, passed by both the House and Senate, is designed to shuttle more debtors away from Chapter 7 bankruptcies, which wipe out most liabilities. Instead, more people would be forced into Chapter 13 filings, which require paying off at least some of what is owed.
Bovitz’s advice, which is echoed by many other bankruptcy attorneys, understandably enrages supporters of the bill, who believe increased advertising by attorneys was one of the reasons insolvency filings spiked between 1996 and 1998--even as the economy boomed.
The advice is also a bit precipitate; Congress has yet to agree on a compromise version of the legislation. And President Clinton has given mixed signals about whether he would sign it.
But even some groups that normally warn people to steer clear of bankruptcy are advising debt-ridden consumers to consider their options if the bill becomes law.
“The odds are that something is going to happen” to restrict bankruptcy filings, either in this Congress or the next one, said Travis Plunkett, a spokesman for the Consumer Federation of America, which strongly opposes the bill. Those who are headed for bankruptcy anyway might think about filing sooner if the bill becomes law, because individuals would probably have a window of a few months before new restrictions would take effect, Plunkett said.
It’s hard to be an advocate for bailing on your debts. We’ve all heard stories about people who lived beyond their means and then used bankruptcy for a fresh start--in effect sticking the rest of us with the costs of their irresponsibility.
Even worse, current bankruptcy rules often favor the wealthy, who can shelter millions of dollars from creditors by using elaborate trusts or by buying homes in debtor-friendly states such as Florida or Texas.
Too many serious concerns have been raised about the reform bill, however, to simply assume that debt-laden consumers would deserve what they get under its provisions.
Many major newspapers, including The Times and the New York Times, have editorialized against the bill’s restrictions. Time magazine investigative reporters Donald L. Barlett and James B. Steele wrote a scathing report in May about the effect of major creditors’ campaign contributions in the bill’s creation.
The legislation:
* Would impose a strict means test on bankruptcy filers and give judges little discretion to waive the rules. It would put credit card debts on par with more pressing bills, such as day care for working parents.
* Would make bankruptcy more complicated and expensive, because the means test would require debtors to provide more paperwork about their finances even when they’re clearly insolvent. More paperwork means more time and more lawyers’ fees. The reforms also would push more people to Chapter 13 filings--but since most of those don’t work out (because debtors can’t or won’t make the promised repayments), many such filers might end up refiling for Chapter 7 anyway.
* Could prevent certain debts from being wiped out, such as cash advances taken from credit cards just before a bankruptcy filing--even if the money is used for necessities and the debtor had not planned all along to file. Bankers and other lenders, meanwhile, would still be allowed to continue to extend credit to already overloaded consumers. Opponents of the bill say creditors’ indiscriminate lending is a leading contributor to the bankruptcy rate.
That rate, and the number of debtors who cheat by filing Chapter 7 when they could repay at least some of their debts, also are subjects of controversy.
After years of steady increases, the number of personal bankruptcy filings unexpectedly dropped last year by 8% nationwide and 14% in the court district that includes Los Angeles County--which happens to be the bankruptcy capital of the U.S.
Some argue that the drop-off proves people are getting smarter about money management and are learning to avoid bankruptcy. Others believe consumers on the edge have, with interest-hungry lenders’ help, simply refinanced their debts through home equity loans or by getting more credit cards--perhaps just postponing the inevitable.
It’s not likely that the decline in bankruptcies will last, however. The jump in interest rates over the last year has boosted many families’ debt costs. What’s more, the economic slowdown now believed to be underway could mean a surge in layoffs. Combined, those factors could send more families into bankruptcy.
What’s more difficult to debate are American Bankruptcy Institute figures showing that fewer than 4% of those who file Chapter 7 could afford to repay any part of their discharged debts. The institute is a nonpartisan organization that includes among its members creditors and credit counselors as well as bankruptcy judges and lawyers.
That statistic refutes creditors’ contentions that billions are being lost each year to bankruptcy fraud--which was what got the legislation started in the first place.
Bovitz, who serves as the vice chairman of the state bar’s commission on personal and small-business bankruptcies, does not minimize bankruptcy’s devastating impact on a person’s life and credit. He acknowledges that many people “live too high, and they don’t plan for a rainy day.”
Once a financial catastrophe hits, however, many people can’t recover without bankruptcy, Bovitz argues.
It would be irresponsible to encourage anyone to file bankruptcy who could afford to pay off his or her obligations.
It could be equally irresponsible, however, to encourage someone whose situation is hopeless to continue to struggle--especially if the process becomes more painful and expensive in the future.
Which leads us back to Bovitz’s advice: “If you can work it out, that’s always the first choice. But if you’re going to file and you’re just trying to figure out when, then file now.”
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Liz Pulliam Weston is a personal finance writer for The Times and a graduate of the personal financial planning certificate program at UC Irvine. Questions can be sent to her at liz.pulliam@latimes.com or mailed to her in care of Money Talk, Business Section, Los Angeles Times, Times Mirror Square, Los Angeles, CA 90053.
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Lull Before a Storm?
Personal bankruptcy filings nationwide, in California and in Los Angeles County fell last year after surging from 1996 through 1998. But possible federal bankruptcy law reform could spark a jump in filings soon.
Source: American Bankruptcy Institute
