By Kathleen Day
Washington Post Staff Writer
Tuesday, October 17, 2006; D01
Sharon Moore says life "felt like a whirlwind" after her seven-month-old restaurant in Portland, Maine, failed in February.
The 38-year-old single mother said she struggled to find work and keep up payments on a small-business loan and other debts that totaled more than $18,000. Late fees and other penalties sent her finances spiraling out of control.
In July, after working two jobs still didn't make ends meet, she filed for Chapter 13 bankruptcy protection. Under a court-sanctioned plan, her escalating penalty charges are halted, but she must make a fixed payment on her debt each month for the next five years. She can keep her house and car and, by the end, she says, will just about have repaid her obligations. Best of all, she says, "the creditor calls have stopped, and I can breathe again."
Moore is one of an estimated 450,000 people who have sought court protection from creditors since a new law took effect one year ago today that made filing for personal bankruptcy harder and more expensive. While that number may seem high, it is down by about 1 million from the average in the preceding four years.
Lawmakers, consumer advocates and industry executives say that much of the sudden drop in filings after Oct. 17, 2005, can be explained by the fact that 600,000 people filed in the two weeks before the law took effect, a scramble that was 10 times the normal level of filing over 10 business days in recent years.
But the filing rate for the first half of 2006, about 10,000 a week, is well below what could be attributed to last year's mad dash, surprising the lawmakers who wrote the legislation and the industry executives who lobbied for it. "So far, I think it is too soon to make firm judgments," said Sen. Charles E. Grassley (R-Iowa), one of the bill's chief architects.
The legislation, the most significant change to the nation's bankruptcy laws since 1978, was the culmination of a decade-long push by the credit card and auto-financing industries to make it harder for consumers to wipe out debts through bankruptcy. The new law toughened the rules with the intent of steering more debtors into a form of bankruptcy that requires people to repay more of their debts.
Typically, people file for one of two types of bankruptcy: Chapter 7 or Chapter 13. Under Chapter 7 bankruptcy, people can seek cancellation of most of their debts after some of their assets are sold to help creditors. Under Chapter 13, debtors must repay debts under a court-supervised repayment plan, as Moore is doing.
Industry executives had argued that about 10 percent of debtors filing each year for Chapter 7 under the old law, or about 100,000 people, abused the system because they could repay a large portion of their obligations and therefore should be required to do so under Chapter 13. Consumer groups and several lawmakers, mostly Democrats, argued that the number of Chapter 7 filers who misused the system is closer to 3 percent but that, in any case, the new legislation does little to weed them out.
The new law requires people seeking bankruptcy protection to pay higher filing fees and attend mandatory credit-counseling sessions with an accredited firm before and after they file. The goal is to discourage people from filing if they don't have to, and if they do, to pay off as much of their debt as possible.
Ed Yingling, president of the American Bankers Association, which fought hard for the bill, agrees that it's too soon to know the bill's impact but says the first year seems promising. "It seems to be wringing out people who abused the system, and those who really needed to file can do so," he said.
But projections about the long-term trend for bankruptcy filings vary widely. One major credit industry company privately estimates that consumer bankruptcy filings will top 1 million in 2007. The estimate was provided to The Washington Post on the condition that the company not be named because the projection is not public information. That estimate is still far below the 1.5 million in annual filings in the years before the law, though the company also predicts a "slow rate of return to historic levels."
Total filings have started to creep up. Two weeks ago, they hit a weekly rate of 15,000 -- halfway to the 30,000 level that was typical before the new law.
Filings such as Moore's under Chapter 13 may indicate a shift. While the number of total filings is down, the portion that are under Chapter 13 has risen significantly in the last year, accounting for about 40 percent of personal filings, up from 30 percent before the new law took effect.
"It's just too early to draw any grand conclusions," said Samuel J. Gerdano, executive director of the American Bankruptcy Institute, a nonprofit, nonpartisan research group. He said one reason that lower-than-expected filings have persisted is that people might be afraid or misinformed. He has heard of anecdotal evidence that some debt collectors are incorrectly telling consumers that the new bill bars bankruptcies or makes it nearly impossible to file, though no one has studied the matter.
"It's very possible there's consumer misunderstanding about the extent bankruptcy protection's available and at what cost and at what hassle," Gerdano said.
The National Association of Consumer Bankruptcy Attorneys, which has opposed the law from its inception, said a survey of its members shows the new law is "failing on an across-the-board basis," adding little except paperwork and expense.
One part of the law that is being closely watched is a requirement that people seek credit counseling from a nonprofit agency approved by the Justice Department. The Internal Revenue Service earlier this year said it would seek to revoke the tax-exempt status of at least 41 of the nation's largest credit counseling agencies, which account for 40 percent of the industry's revenue, saying the firms appear to be primarily interested in making a profit rather than helping debt-burdened consumers.
The section of the Justice Department that oversees the nation's bankruptcy system is the U.S. Trustee Program. Its budget comes from the fees people and businesses pay to file for bankruptcy, and so far, it's approved 150 credit agencies to provide counseling.
Privately, program officials have expressed dual concerns that if bankruptcies return to former levels, there will be a critical shortage of approved counseling agencies. At the same time, if bankruptcies stay unexpectedly rare, the program may find itself short of operating funds.
Trustee Program spokeswoman Jane Limprecht would only say the program has adequate funding and that there will be sufficient counseling if filings increase.
The National Foundation for Consumer Counseling, which represents many nonprofit firms, yesterday released a survey of its members that found that the industry has been able to handle the volume so far. But the survey also found that a firm's average cost of counseling a person is $50 but that on average it can collect only $40 to pay those costs.
