No longer able to keep up with credit-card bills, Ethel Elliott recently joined thousands of Marylanders rushing to file for bankruptcy before a new law kicks in next week that will make it harder to erase debts.
The 78-year-old widow lives on a fixed income in a Baltimore County trailer park, where she cares for a 45-year-old daughter who suffered a stroke at the age of 3. By filing for bankruptcy, Elliott seeks to wipe out about $33,000 in card debt, most of it accrued over the years for medication and other living expenses, she said. "I feel bad that I had to do it. I always paid my bills," Elliott said.
After bankruptcies in Maryland had been falling in the first half of this year - which experts credit to a stronger economy and low interest rates - filings began a steep ascent in recent weeks. For instance, in the last two weeks of September alone, Chapter 7 filings in the state climbed to 1,938, a 162 percent increase over a similar period a year ago.
Call it the storm before the calm.
The new law, which takes effect Oct. 17, is the most sweeping overhaul of the bankruptcy system in decades. It will set up more hurdles - such as means testing and credit counseling - for filers wanting to wipe out debt under Chapter 7. It also will steer more debtors into Chapter 13, where they will have to repay at least some of their debt over five years.
Intricacies of the law
Lawyers and their clients will take time to get accustomed to all the intricacies of the new law, and most bankruptcy experts expect a substantial drop in filings during the first few weeks.
"Lawyers will be reluctant for their client to be the first one to find out how this thing works," said Jay Westbrook, a law professor at the University of Texas.
"I would be surprised to see any filings until probably toward the end of the week, if not a week later," said Mark Scurti, a Baltimore bankruptcy lawyer.
One of the biggest changes in the new law will be a means test to determine whether filers could pay back some of their debt.
Those at or below the median income for their state would qualify to file under Chapter 7, although that could still be challenged. In Maryland, the median income is $46,624 for an individual, $58,556 for two, and $85,554 for a family of four.
Those above the median income might still be eligible for Chapter 7, depending on further means testing. It's a complicated formula that "would give the Office of Budget and Management a hard time," Westbrook said.
Basically, the formula looks at the average monthly income over the past six months and subtracts certain expenses, some of which are based on local and Internal Revenue Service standards. If after that calculation, debtors' monthly disposable income is $100 or more, they could be required to convert to a Chapter 13. Exceptions can be made if debtors can show special circumstances that would allow them to remain in Chapter 7.
Many bankruptcy experts say the great majority of filers won't be affected by the means test because they earn less than the median income. A 2001 survey of about 1,220 cases reviewed by the Consumer Bankruptcy Project found that 92 percent of filers fell below their state median income, according to Westbrook, who worked on the project.
That's the case with Elliott, the Baltimore County filer who lives largely on Social Security benefits.
But even if Elliott and thousands of others would still qualify for a Chapter 7, the new law will place more hurdles for filers to overcome.
For instance, within six months before filing, debtors must undergo credit counseling by a nonprofit approved by the U.S. Trustee Program. As of last week, 41 nonprofits had been approved, including six to counsel Marylanders.
The average session
The average session is expected to last 90 minutes, and must cover budget analysis and a discussion on the consequences of filing, alternatives to bankruptcy and factors causing the money troubles.
Consumer Credit Counseling of Maryland and Delaware, one of the approved nonprofits for Maryland, will provide counseling over the phone or in person. It will charge $50 for a session, although the fee can be waived for those who can't afford it. "We are not here to decide whether a person should file bankruptcy or not," said Jim Godfrey, executive vice president of the Catonsville nonprofit.
The group's pre-bankruptcy counseling will be similar to what it does now, he said. That includes telling debtors that a Chapter 7 filing will remain on their credit report for 10 years and could affect job prospects, ability to rent an apartment or lead them to paying higher interest rates on credit. Chapter 13 remains on a report for seven years.
Those who complete the counseling will receive a certificate.