Pro-Creditor Bankruptcy Act Proves Onerous for Many

Pro-Creditor Bankruptcy Act Proves Onerous for Many
FAE to Hold Half-Day Conference on New Law in September

With April’s enactment of the Bankruptcy Abuse Prevention and Consumer Protection Act, one thing is clear: creditors are in a much better position than they previously were to collect debt. What’s less certain, however, is the impact that the momentous legislation will have on everyone from CPAs and lawyers to the courts and the public that is considering filing for protection.

Accordingly, The Trusted Professional recently contacted several bankruptcy experts to hear their views on the implications of the new law.

“There is an expectation that there will be significant bankruptcy filings of personal bankruptcies between now and the new act’s effective date (Oct. 17, 2005) because there will be many restrictions and limitations on an individual’s abilities to file a Chapter 7 and wipe out all their old debt,” said Ron Fink, CPA, a turnaround-workout specialist with Tono-Bungay Consulting Inc. in Port Washington, N.Y.

Not only does the new act make it harder to file for bankruptcy, but the “fresh start” that Chapter 7—and its ability to wipe the slate clean—has traditionally offered consumers could now become the exception and not the rule for many seeking protection. Under the new code, more parties will have a greater ability to challenge whether a filing was made in good faith, with the standard for dismissal being lowered from substantial to simple abuse.

At the heart of the act is a means test that analyzes an individual’s income and monthly expenses. If, based on the analysis, it is determined that the individual is able to pay a certain percentage of his debts over a five-year period, the case can be either dismissed or converted into a Chapter 13 filing, with all disposable income, except for $100 a month, to go into a repayment plan. If the debtor earns below the median income, he can still file for Chapter 7.

“That’s the major thing, and that’s where creditors are much better off, because someone in the past would say, ‘Fine, I’ll walk away from my debts and that will be it,’” said bankruptcy and forensic accounting expert Jake Renick, CPA, of M.J. Renick & Associates LLC in New Rochelle. “Now that no longer happens, because I can’t walk away from the debt. I have to use that money I’m earning to pay my debt. So that is very significant, because my future income is sort of captured.”

According to attorney Jeff Solomon, whose practice is located in Woodbury, N.Y., the new law creates a rather “onerous” system that does not have a proven track record of success and puts credit card debt on the same playing field as child support and alimony.

“So you have a Chapter 13 that people go into voluntarily under the present law, and probably 70 percent of them go bust before they complete it anyway,” Solomon said. “Now you are talking about forcing most people into what is an unsuccessful system.”

Under this system, Solomon said, the consumer bankruptcy process and the courts could become overwhelmed with hearings that question the validity of a means test or address a missed plan payment because of unforeseen outstanding circumstances.
Solomon is also concerned that the new law will, in effect, make debtor’s lawyers responsible for the accuracy of the financial information their clients provide the courts.

“There’s a very real liability, and it is to a certain extent going to have a chilling effect on the willingness of a certain segment of the bar to continue to practice debtor’s law,” said Solomon, noting that attorney’s fees will naturally increase as a result of more-burdensome reporting and documentation requirements. “It’s dangerous because…why would I ever want to be a guarantor of your financial statements?”

Before consumers will even have the opportunity to submit such information, however, they will first be required to attend a credit counseling course. Once in Chapter 7 or Chapter 13, debtors also will be required to complete an instructional course on personal financial management. Because debtors will pay for the bulk of this education and training, this provision could prove to be another barrier to entry into bankrupcy.

“The cost of credit counseling will keep a lot of people out,” Solomon said. “Someone who is about to lose their house, and who has sometimes been paying their electric bill, is not going to have $500 to give to a credit counseling agency, and they’re not going to have $1,500 to give to a lawyer.”

While it is yet to be seen how the credit counseling will be offered, Fink and Renick said the requirement could provide CPAs with a possible business opportunity.

“Those accountants, probably not firms, who want to get into the credit counseling business, there will be a huge opening because there are all these people who will need counseling going forward,” said Fink, chair of the NYSSCPA’s Bankruptcy and Financial Reorganization Committee.

Fink added that the means test also will necessitate professionals who are capable of assessing whether an individual can satisfy some of his debt.

“That is where the CPAs are going to get some added business, because who else is better qualified to evaluate whether this person should be paying back or not,” Fink said.

The Bankruptcy and Financial Reorganization Committee will sponsor a half-day conference on the new bankruptcy act on Sept. 28. The event will cover both consumer and commercial bankruptcies.

In the next issue, The Trusted Professional will briefly examine some of the new provisions regarding business bankruptcies.