News

Bankruptcy Rules Getting Stricter

April 15, 2005

by HARRIET JOHNSON BRACKEY
The Miami Herald

Reprinted from The Miami Herald
http://www.miami.com/mld/miamiherald/11398631.htm

Congress approved a bankruptcy bill Thursday that would make it much harder for debt-burdened consumers to fend off their creditors.

The change will be huge for Florida, which is known as a debtor's haven. The state's generous homestead exemption law -- which allows those in bankruptcy to protect the full value of their homes -- will be limited from the day President Bush signs the bill.

''These common-sense reforms will make the system stronger and better so that more Americans -- especially lower-income Americans -- have greater access to credit,'' Bush said in a statement. ``I look forward to signing the bill into law.''

The sweeping new law, passed on a 302-126 vote in the House after approval by the Senate last month, wipes out the system that allows many consumers to erase their debts by filing for Chapter 7 protection. In its place will be benchmarks that will force people who have more than their state's median household income (Florida's is $38,972) into a five-year repayment plan.

And, filing for protection will no longer be a quick process. Debtors will have to go through and pay for credit counseling for six months before any filing can be approved.

''For people who are in desperate trouble, who are about to lose their house, that's clearly an impediment to filing at a time when people need it,'' said U.S. Bankruptcy Judge A. Jay Cristol in Miami. ``It's a sad day. This is a very unfortunate bill, a very bad bill.''

According to a study released in February by Harvard University, almost half of all bankruptcies are related to a family medical crisis and medical bills in excess of $1,000.

Last year, 1.56 million people filed for federal bankruptcy protection.

But bankers argued that Americans end up paying $400 a year in higher fees and interest rates because of the losses creditors suffer because of bankruptcy.

''The bankruptcy reform bill passed today will protect and improve our nation's financial safety net,'' American Bankers Association Executive Vice President Edward Yingling said in a statement. ``It will ensure that bankruptcy protection is fully available for the neediest Americans, while reining in some filers who wrongly use the system as a financial planning tool.''

The banking and credit card industry, by various estimates, spent $40 million to $60 million to lobby for such legislation over the past eight years.

The new law ''protects the credit industry at the expense of the consumer,'' Rep. Alcee Hastings, D-Miramar, said in House debate Thursday.

A spokesman for Visa USA declined to comment.

The law will be effective six months after Bush signs it for most provisions, but not the homestead exemption limit.

Attorney say the new law will spur a rush to the courthouse, as people try to file bankruptcy before the new law takes effect.

''I started seeing it about a month ago, an increase in my business,'' said Miami attorney Robert D. Dunn.

Under existing bankruptcy law, Florida opted out of federal homestead exemption limits and uses its own. That allows residents to protect a home of unlimited value from creditors, so long as the home sits on a half-acre or less within an incorporated city, or on a 160-acre lot outside city limits, according to Craig Eller, an attorney at Broad and Cassel.

Iowa, Kansas, South Dakota and Texas also have unlimited homestead exemptions.

The new law contains a provision to stop anyone from fleeing to debtor-haven states just before filing for federal protection from creditors.

From the day Bush signs the bill, anyone who has bought a home within the previous 40 months will be able to protect only $125,000 in their home's value.

''I think any debtor contemplating bankruptcy who acquired a home in the last 40 months should probably be speaking to a bankruptcy lawyer about beating the president's signature,'' said Michael Goldberg, a bankruptcy lawyer with Akerman Senterfitt.

For Florida residents who have owned a house longer than 40 months, Florida's current homestead exemptions will apply.

Floridians filing for bankruptcy will still be able to protect pensions, insurance policies and annuities of any amount. Federal law, too, guards retirement savings accounts.

Another important change with the new law is the means or income test. This will force people with income above a state's median and who can pay at least $100 a month over five years to repay their debts under Chapter 13 of the federal bankruptcy code.

Currently, most consumers enter Chapter 7 protection, which erases debts after certain assets are forfeited. Those with low incomes or few assets could still qualify under the new law.

''It's going to be a very big impact,'' said Kenneth Welt, a bankruptcy trustee who oversees consumer cases in South Florida. ``It closes a lot of loopholes, but most people are honest debtors in financial trouble that they didn't cause.''

Reprinted from The Miami Herald
http://www.miami.com/mld/miamiherald/11398631.htm

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