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But Does It Mean More Business, or Just More Work for Attorneys?

By Andrew R. Chivinski

In 2005, the consumer credit lobby realized the fruits of approximately ten years of vigorous campaigning efforts when Congress passed the Bankruptcy Abuse Prevention and Consumer Protection Act. The Act, which was signed into law by President Bush and became effective in October of 2005, was intended to radically reduce the amount of chapter 7 filings nationwide by essentially placing a barrage of obstacles in the path of any would-be filer. These obstacles included such new requirements as:

1. mandatory credit counseling and debtor education via an “approved nonprofit budget and credit counseling agency”; 
2. additional fees and paper filing requirements; 
3. increased attorney liability for failure to investigate and verify accuracy of clients’ filings; 
4. fewer automatic “stay” protections; and 
5. increased length of time permissible between discharges.

Perhaps the most well-known of these obstacles is the introduction of a “means test” for chapter 7 filings. Whereas previously there was a presumption of eligibility subject only to judicial discretion, the Act imposed new statutory requirements for filers whose gross income is above the median income in their state. These filers, or their retained counsel, would have to essentially calculate their “disposable monthly income” to determine whether they are eligible for chapter 7, and if not they would be forced to file under chapter 13.

Not surprisingly, the motivating forces behind the Act were overwhelmingly credit card and consumer credit lobbyists. Indeed, the legislative process was described as a lobbyist free-for-all even by those whose job it was to push the legislation through. “Suppose you let a bunch of school kids loose on an old car with a paint brush”, described Stephen Case, a former partner at Davis, Polk & Wardwell in New York and an adviser to the National Bankruptcy Review Commission, which proposed much of the current legislation back in 1997. Likewise, the credit lobby’s influence on the Act drew the ire of judges who were surprised at how they were left out of the legislative process. “The bill was drafted without consultation with bankruptcy judges and courts”, complained 9th Circuit Chief Judge Mary Schroeder. Chief Judge Barry Russell of the Central District of California Bankruptcy Court commented: “I really have no opinion one way or the other on it, but there was not a lot of legislative history,” he said. “Other than the banks and creditors, from the newspapers, I don’t think anyone thought it was a good bill.”

The merits of the Act aside, this new legislation was bound to have an effect on more than just creditors and debtors. Bankruptcy attorneys, accustomed to dealing with a statutory scheme that had been in place since the late 70’s, were now faced with new laws and new requirements for chapter 7 filings. In addition to increased requirements, which essentially added to the checklist of burdensome tasks to be undertaken on each case, there was also a concern of how this would affect the number of filings and, ultimately, each practitioner’s respective caseload. As most bankruptcy attorneys are of the sole practitioner variety, it is clear how these concerns could eventually represent a threat to these attorneys’ practices in an economic sense.

Therefore, upon the Act becoming law, the question of all questions was whether there was any appreciable impact on filings. Predictably, immediately before the Act became law, there was a rush of filings intended to beat the clock on facing the new requirements, specifically the dreaded “means test”. Therefore, clarity on this issue for the years 2005 through 2006/2007 may be hard to come by as many debtors who might ordinarily have filed in 2006/2007 filed in 2005 instead, hoping to avoid the teeth of the new legislation. However, it is true that filings decreased immediately following the Act’s implementation.

Any belief that the years of 2008 onward would reveal more accurate figures for decreased chapter 7 filings, and therefore vindicate creditors hoping to benefit from the Act’s stringent provisions, was swept aside by what has proven to be a force far more powerful than the Washington credit lobby itself: the economy. In the midst of an undeniable recession, bankruptcy rates have skyrocketed as individual debtors feel the crunch of a down market and troubled economic times.

According to the American Bankruptcy Institute (ABI), the nation’s largest, non-partisan bankruptcy research institution, consumer filings increased approximately 33% percent in 2008; increasing to 1,064,927 from just 801,840 in 2007. ABI Executive Director Samuel J. Gerdano credited the “high debts, flat incomes, and now declining home values”, and predicted that 2009 would see a continuance of the upward spike in personal bankruptcies. Indeed, some of the states with the highest levels of bankruptcy filings, Florida, Nevada, and California, are also among the states hit hardest by the real-estate crash and foreclosure crisis. “We expect the numbers will continue to go up” Gerdano says. “It’s the aftermath of the debt overhang that many households are facing, plus an inability to tap into home equity, which traditionally helped buttress home finances.”

Thus far in 2009, Gerdano’s prediction has rung true, as the ABI estimates US consumer filings in January rose another 34% from the same period a year ago. Further evidence of the economy’s effect on bankruptcy cases lies in the increase in corporate filings, which doubled in the first seven weeks of 2009 from the same period in 2008; although many were Chapter 11 reorganization filings as opposed to liquidation filings.

The silver lining in this cloud of consumer and corporate insolvency, at least as far as attorneys are concerned, would seem to be an increased case load for bankruptcy attorneys. A typical bankruptcy retainer tends to involve a flat-fee, much like DUI or other criminal defense work. Thus, in terms of business, volume is key for sole practitioners seeking to make ends meet in a strictly bankruptcy practice. Accordingly, logic would appear to dictate that the increase in filings is an indicator of good times for bankruptcy attorneys who no longer have to worry about when the phone will ring. Think again.

While the Bankruptcy Abuse and Prevention Act may not serve to dissuade debtors in these times of financial tempest, the attorneys who work the bankruptcy cases are still left to face and overcome the new obstacles and minefields the Act imposed. Again, bankruptcy attorneys are now subject to increased liability for failing to conduct diligent pre-filing investigations of their prospective clients. Attorneys are required to “certify” the numbers advanced by a client with regard to their income, expenses and debt are accurate. If said certification is turns out to be inaccurate or false, attorneys and clients alike can face sanctions.

Moreover, the Act basically increased the paperwork associated with the filing of a typical chapter 7 case. Add this to the fact all chapter 7 filers must pass the “means test”, and one can see how the job of an attorney becomes more critical and far more complicated, if not just more burdensome.

It is, perhaps, still too early to tell how practitioners will handle this increased workload. For now, most attorneys will likely just grin and bear it, happy to have business booming in the midst of a recession. It could be that the role of highly trained and experienced paralegals to assist attorneys will increase, and thus so will the need to train and educate individuals for just these types of positions. Regardless, however attractive the bankruptcy business may seem to attorneys looking to take advantage of the recent surge in available clients, the almost overbearing amount of work that awaits them should provide some caution.

Ike Shulman, co-founder of the National Association of Consumer Bankruptcy Attorneys, puts it best: “People attracted to doing consumer bankruptcy work by and large have to have some sympathy for the underdog- - not going into law because you think you’re going to hit the financial lottery,” he says. Those thinking otherwise will soon be faced with an aggressive and burdensome statutory scheme, aimed at beating the attorney down and discouraging future filings.

“I think the credit card companies thought that shutting down bankruptcy by changing the law and making the process unmanageable was a key element of what they were trying to do, and it was aimed at making the lawyer’s life miserable,” Shulman says.

With an increased in clients to work for, and an increase in work to do for each client, they may have succeeded in part. But no doubt the recession has breathed new life into this area of practice for anyone willing to put in the time and effort.

Andrew R. Chivinski is an associate at Neil Dymott and concentrates his practice on professional liability, personal injury and general civil litigation. Mr. Chivinski may be reached at  achivinski@neildymott.com
 

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