Bankruptcy filings up 20% in state in 1Q

Reforms pending in Congress get most of the blame

People rush to beat law

`Administrative disaster' is feared if overhaul enacted

May 13, 2001|By Eileen Ambrose | Eileen Ambrose,SUN STAFF

A softening economy and looming changes in bankruptcy law that will make it harder for individuals to wipe out debt have led to a surge in bankruptcy filings this year in Maryland and elsewhere.

For the first three months of the year, the number of Chapter 7 filings - where debtors can erase most of their unsecured debt - reached 6,292 in the state, a 20 percent increase over the first quarter last year.

National figures aren't available yet, but other states, too, are reporting increases, including Kansas, Vermont, Minnesota, Washington, Virginia, New Mexico, New Jersey and Rhode Island.

The rise comes after U.S. personal bankruptcies fell in 1999 and 2000 from a peak of 1.4 million in 1998. Maryland ranked ninth in the country last year for bankruptcies per household, with one filing out of 64 households, according to the American Bankruptcy Institute.

The weakening economy gets some of the blame for the upswing in filings so far this year, experts said. In April, for instance, unemployment nationwide rose to 4.5 percent, a level not seen for more than two years.

The state's unemployment rate of 3.5 percent in March was down for the third straight month and below the national average, but job growth has slowed since last year.

But many lawyers and bankruptcy experts said the spike also is due to the belief that bankruptcy reform, something the credit-card industry has long lobbied for, may soon become law after previously being vetoed by President Bill Clinton.

The House and Senate in March passed similar legislation to make filing for bankruptcy tougher, and President Bush has indicated he will sign the bill. The legislation has yet to go to conference committee, where differences in the versions will be ironed out.

Essentially, the legislation seeks to reduce the number of filers under Chapter 7 and push more of them into Chapter 13, where they repay a portion of their debt over a period of up to five years.

Clients often are aware of the pending bankruptcy overhaul and ask whether they should file before it becomes law, according to bankruptcy lawyers.

"In part, there is a fear arising from this new bankruptcy legislation. Everyone has heard it's going to be horrible, and they want to get in before the new legislation is enacted," said Constance Hare, a Pikesville bankruptcy lawyer.

Hare said about a dozen clients have been coming in each week this year to discuss their bankruptcy options, twice the usual number.

Lori Simpson, a Chapter 7 trustee in Baltimore, said she had 49 cases on her schedule one day last week - twice her usual workload.

"There is a lot of media hype that has caused a lot of our clients to question and ask about changes in the law. A lot of that anxiety is just misinformation," said Mark Scurti, a Baltimore bankruptcy lawyer.

Scurti said that when he reviews cases of clients worried about the proposed law, he normally finds that they would still qualify for Chapter 7.

"The public perception is that it is much more Draconian than it actually is," said Todd Zywicki, an associate professor of law at George Mason University in Virginia who has advised Congress on bankruptcy reform.

Zywicki said it's hard to know how many debtors are abusing the system, but estimated that 7 percent to 10 percent of those filing under Chapter 7 could repay on average 60 percent of their debt.

Under the proposed legislation, all debtors before filing must undergo consumer credit counseling, which attempts to work out a repayment plan with creditors.

If that fails, debtors can file for bankruptcy protection under Chapter 7 provided they meet certain criteria.

Debtors who earn less than their state's median for someone in the same job can file a Chapter 7. For instance, the median income nationally for a family of four was $59,981 in 1999, according to the latest figures from the U.S. Census Bureau. In Maryland, that figure was $74,806.

Debtors above the median income level must jump over other hurdles to file under Chapter 7.

After certain expenses are taken into account, debtors who can repay over five years at least $10,000 of unsecured debt, or 25 percent of the debt with a $6,000 minimum, must file under Chapter 13.

There is one other way for those who don't meet Chapter 7 requirements to file under the chapter, Zywicki said. A debtor may be able to convince a judge that circumstances, such as lost work due to caring for an ailing parent, warrant the filing under Chapter 7, he said.

Once the president signs the reform legislation, the changes won't take effect for 180 days.

"After it's enacted, you would expect a rush to the court house in the 180-day period," said Zywicki, adding that this may lead some reform supporters to argue for a shorter effective date.

Some experts and consumer advocates say the proposed legislation will hurt those whom bankruptcy is meant to help.

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