Oct 27, 2010

The New Bankruptcy Law: Little Change for Most Debtors (Other Than Pricier Lawyers)

In 2005, Congress made big changes to the bankruptcy laws. In the six-month lead up to those changes, Chapter 7 bankruptcy filings spiked because people were told that the new laws would make it much harder to file for bankruptcy. After the new law took effect, filings plummeted, in part because people now believed (thanks to the pre-change marketing efforts by bankruptcy attorneys) they could no longer file under Chapter 7. Due to the great recession, however, filings are once again spiking and are close to the pre-change level.

So what's the story? Is Chapter 7 bankruptcy harder to file now than it was before the law changed, or was that perception wrong (and wrongheaded)?

As with so many things in life it's kind of an 80-20 proposition. For about 80% of Chapter 7 bankruptcy filers, the main change has been that many bankruptcy lawyers doubled their fees. So, for people using lawyers, Chapter 7 has become much more expensive. Not a trivial change to be sure. But, if people in this 80% category file without a lawyer -- which is a feasible option in most cases -- then they will see little change overall. The other changes (the main ones include a credit and budget counseling requirement, submission of tax returns and wage stubs, and a reaffirmation agreement if you want to keep a late model car you're making payments on) have proved to be relatively insignificant and easy to comply with.