Bankruptcy Filings Soar In Advance of New Law

Hurricane Katrina victims Alice Lee and her husband, Richard, of LaPlace, La., check over paperwork for a bankruptcy filing. Storm damage at his place of work cut his salary by half.
Hurricane Katrina victims Alice Lee and her husband, Richard, of LaPlace, La., check over paperwork for a bankruptcy filing. Storm damage at his place of work cut his salary by half. (By Michel Ducille -- The Washington Post)
By Caroline E. Mayer
Washington Post Staff Writer
Wednesday, October 5, 2005

Two weeks before a new, more restrictive national bankruptcy law goes into effect, financially strapped Americans are rushing to file for protection from their creditors, with filings climbing to an unprecedented average of 13,000 a day last week.

Week after week records are toppled. Last week's 68,287 filings surpassed the record set the week before by 24 percent, and this week's total is likely to be higher, according to data released yesterday by Lundquist Consulting Inc., a financial research firm. Daily filings averaged 10,367 in September, compared with an average of 6,079 in September 2004.

The surge is in anticipation of the new bankruptcy law, long sought by the financial industry, which takes effect Oct. 17. The law will make it harder and more expensive for people to completely wipe out their debts under Chapter 7 bankruptcy.

"We are seeing a rush, mainly from people we saw a year ago," Northern Virginia bankruptcy lawyer Robert Weed said. A year ago his clients thought they would be able to work their way out of debt without filing for bankruptcy, he said, "but now they're in a panic to get in before the law is changed."

That is what prompted Samantha Gordon, 28, of Woodbridge to file. "I was putting it off and putting it off," the single mother of three said. Gordon, a patient-care coordinator, said she kept hoping to pay off her debts, but every time she had thought she was close, "a new bill, mostly medical, came up." She decided to take action after her father alerted her about the new law.

In the Washington area, many lawyers report major increases in bankruptcy clients over the past month. Some are so busy they have stopped accepting new clients. Weed's three Northern Virginia offices, for example, stopped taking new clients in mid-September, except in an emergency, such as someone whose wages were about to be garnished.

2005 Weekly Bankruptcy Filings
Lawyers say some people are under the mistaken impression that they will not be able to file for bankruptcy protection after Oct. 17. The new law sets tighter requirements for filing, including the condition that a debtor's family income must be below the median for his or her state to completely erase debt. Locally, the median income for a family of four is $62,167 in the District, $71,948 in Virginia and $85,554 in Maryland. That means many debtors will still be able to file for Chapter 7, local attorneys said.

Even so, under the new law, the cost of filing will be higher, and those filing will be required to provide more paperwork, including six months of income and expense data, and attend credit-counseling sessions before filing.

A coalition of bankruptcy lawyers and consumer advocates has pressed Congress to delay the law's implementation date for Hurricane Katrina victims, especially since many had no plans to file until the storm damaged their homes and cut into their pocketbooks.

The U.S. Trustee Program, which oversees the nation's bankruptcy courts, yesterday announced it would temporarily waive the credit-counseling requirement for Katrina victims. The trustee's office said disruption in communication services in the area could make it difficult for debtors to contact credit counselors.

Richard and Alice Lee of LaPlace, La., whose three-year-old house was damaged by Katrina, were among those who suddenly found themselves contemplating bankruptcy. They probably could have afforded repairs on Richard Lee's salary, which had been about $100,000 a year. But the storm took its toll on the Harley-Davidson dealership where he was manager, cutting his salary by half, he said.

With five children, finances were tight before the hurricane, Lee said. "We had never missed a payment and were always on time with our bills, but we couldn't afford for anything to go wrong." Now, the Lees are getting ready to file for bankruptcy. "We know it's going to have to happen, and we'd do a lot better now. We do it after the law changes, it would be harder."

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