New bankruptcy law will affect many Utahns, make debt relief tougher

By Amy Moore

May 3, 2005 | Bankruptcy is not easy for anyone, and it just got harder.

Nick, whose name has been changed at his request, filed Chapter 7 bankruptcy about two years ago after finding himself unemployed with about $18,000 of debt from loans and credit cards.

"It was a last-ditch sort of solution," Nick said. "It was helpful."

With the passing of a new law signed by President Bush on April 20, it's not getting any simpler to void debts, and declaring bankruptcy is going to stay on your credit longer.

Currently more than two-thirds of bankruptcy filers across the country use Chapter 7. Under this, debtors have the opportunity to ask a bankruptcy judge to forgive all of their debts and the court appoints a trustee to auction off some of their personal assets to distribute to creditors.

Under the new policy, the debtor will be subject to a means test where those who earn more income than the state's median wage (in 2003 it was $49,143 in Utah according to the Census Bureau) could be pushed into a Chapter 13 filing. A Chapter 13 filing requires the debtor to make a plan to repay the creditor in three to five years. The new policy makes it a five to seven year period to repay debts. The new requirement also makes all bankruptcy filers pay for credit counseling.

The Salt Lake Tribune reports that this is the first rewrite of the bankruptcy code in 25 years. It passed the House of Representatives by a 302-196 vote, and the Senate approved it last month on a 74-25 vote. President Bush has said he was anxious to sign it and did so last week. The new policy will go into effect Oct. 17, 2005.

When asked about the new bankruptcy law, Nick said he likes the idea of cutting down on bankruptcy abuses, but doesn't like the new means testing and thinks it will hurt a lot of the middle-class people who have large medical bills and are not abusing the bankruptcy system.

Darwin Bingham, a partner at Scalley & Reading in Salt Lake City who is also an attorney representing creditors' rights, says we'll have to wait and see. "I don't know if (the new law) will affect Utah that much. A lot of people that are filing now don't make the median income so it won't affect them too much," Bingham said.

Elizabeth Warren, a professor at Harvard University, in an interview with the Wall Street Journal says under the new bill, those who make below the median income will still be able to file Chapter 7.

According to the American Bankruptcy Institute(ABI), in 2004 one in every 36.5 households in Utah filed for bankruptcy, the highest percentage in the nation. But the Utah Bankruptcy Court reported that Utahns filed 8 percent fewer bankruptcies so far this year. Even though bankruptcy trends in Utah are falling in the first quarter, experts are expecting them to rise as the new policy goes into effect.

In an interview with the Deseret Morning News, Kevin Anderson, standing Chapter 13 trustee in Salt Lake City, who said under new bankruptcy legislation a spike in Utah filings is likely. Roger Griffiths, collections manager at Mountain America Credit Union in Salt Lake City, said the credit union has already seen an increase in filings.

The Deseret Morning News states that more Utah filings are likely because, according to an ABI report, between 30,000 and 210,000 people, from 3.5 percent to 20 percent of those who file Chapter 13, would be disqualified from doing so under the legislation.

"It will require more and give you less debt relief," Anderson said. "It used to be you were discharged of just about anything in a Chapter 13. Now fewer debts will be discharged."

The new law will mostly benefit financial institutions that usually don't see any sort of payback on loans that are written-off because of bankruptcy. With the new means test, institutions will be able to see the debtor's income and determine that they really need to file bankruptcy and they aren't just doing it to get out of their debts.

Griffiths said Mountain America sees about 60 bankruptcies a month. Last quarter they had 140 Chapter 7 filings and 40 Chapter 13 filings, he said. He hopes that the new law will swap that number to 40 Chapter 7 filings and 140 Chapter 13 filings so the institution will see more of a payback on loans, he said. "We lose $200,000 in write-offs a month. In 2004 we lost approximately 1 million dollars because of bankruptcy," said Griffiths.

Bingham said most people want to pay their debts, they just buy too much too soon instead of saving or buying something they can afford. He said there are a variety of factors that lead to bankruptcy, but unemployment, home loans and credit cards are a big factor.

Griffiths estimates that 95 percent of member bankruptcies at Mountain America have a least one major credit card debt. At the time Nick filed for bankruptcy, he had four credit cards totaling about $11,000.

"I think it is highly hypocritical to tell people not to go into debt and have credit card companies handing cards out," Nick said. "Aggressive marketing is highly destructive."

The statistics seem to prove his point. In a report from the Federal Reserve, credit card debt rose by 14 percent from $703.9 billion in 2001 to $800.1 billion in early 2005.

The Newhouse News Service recently did a study involving data from the Federal Reserve, bankruptcy courts and the Census Bureau and found that "credit card debt and bankruptcy filings have increased nearly in lockstep since 1980." Nonbusiness bankruptcies have increased roughly 320 percent from 1980 to 2004. Also, revolving credit, which is made up of almost entirely credit cards, increased 360 percent during the same period.

Nick is all right financially now with only one credit card he only uses for emergencies. He prefers cash.

"We're too wrapped up in the acquisition of goods," Nick said. "But I've learned a lot."

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