Legislated out of debt relief

4/17/2005

Northwest Ohio and southeast Michigan residents who might think about getting their debts forgiven through bankruptcy could be in for a rude awakening.

Many of them make too much money to be able to liquidate their debts, and will have to agree to repay their creditors.

That's one of the tenets of reform legislation passed last week by Congress and expected to be signed into law by President Bush. The tighter rules would go into effect six months later.

Under the bill, people whose monthly income is higher than their state's household median income will no longer be allowed to automatically file for Chapter 7 and erase most of their debts.

Instead, they will undergo a "means" test, deducting various expenses from that monthly income to determine remaining disposable income.

If a filer has at least $100 left each month, or $6,000 over five years, he or she would have to file under Chapter 13 and repay over time a portion or even all of his or her bills.

"You're virtually going to wipe out bankruptcy filings from people who live in big cities because they presumably have much higher income than the rest of the state," said Adam Brauer, a consumer advocate and attorney with DebtSettlementUSA, a Scottsdale, Ariz., debt negotiation firm.

Such a means test is not part of the current law, under which northwest Ohio has set four consecutive annual records for numbers of bankruptcy filers.

This year's filings are on pace to reach yet another record.

The change could be huge for area filers. Of the 10,623 bankruptcies filed last year in the 21 counties covered by U.S. Bankruptcy Court in Toledo, 90 percent were Chapter 7.

Half the 16 northwest Ohio counties closest to Toledo have higher median incomes than Ohio's median of $41,400.

Also, the median incomes in Monroe and Lenawee counties in southeast Michigan are higher than that state's median of $44,400.

"They've got some sort of norm that they've come up with for the area that just won't work, and it's not going to reflect what's going on in [the filers'] financial lives," said Mark Powers, a bankruptcy attorney in Wauseon in Fulton County.

"My fear is that this is not dealing with what the real income and expense situation is and it will push people into Chapter 13 who, in my opinion, will not be viable Chapter 13 candidates," he said. "Therefore, they'll fail in the 13 and then the cases will be dismissed and they won't get any benefit."

Bankruptcy judges in the Toledo court won't comment until they have time to digest the new law. But Bruce French, a Chapter 7 trustee for the court in Lima, Ohio, anticipates prudent attorneys probably will file Chapter 13 cases in the hope they can be converted to Chapter 7.

The reason, he said, is that no matter that proponents of the measure say it's intended to stop cheaters from defrauding the system, the majority filing bankruptcy are doing it as a last resort.

"I would bet that at least 75 percent of the cases will eventually end up in Chapter 7, because most of the filers I see either have medical emergencies, have substantial credit-card debt, or have lost their job or are getting a divorce," Mr. French said.

"They are honest people who have fallen on hard times."

Agreeing is Bowling Green attorney Steve Spitler, who handles only Chapter 7 filings. He said most of his clients make less than Wood County's median $44,442 income.

"There's a misconception of people running up huge bills and then filing bankruptcy to get out of paying them," he said. "The vast majority of my clients are embarrassed and that's the last thing they're going to do."

Henry Sommer, president of the National Association of Consumer Bankruptcy Attorneys, estimated that 20 percent of current filers have incomes above their state's median.

The bigger problem, he said, is the test to determine monthly expenses. It likely will be based on Internal Revenue expense rules, he said, and those rules "have no relationship to your real expenses," said the Philadelphia attorney.

In northwest Ohio, of the 2,989 cases filed in the first three months of this year, 2,693 were Chapter 7, up 24 percent from the period a year earlier. Chapter 13 cases, numbering 294 through March, also have risen, by 6 percent from last year.

Although Lucas County's median household income of $36,804 is below Ohio's $41,350, many recent filers have well-paying factory jobs, so their household incomes would exceed the state median.

"I think there's no question there are some honest people who are going to get caught up in this and will end up being put in a worse position, just because their income may look like it's higher than the median," said Toledo attorney Stephen Priestap.

Contact Mary-Beth McLaughlin at: mmclaughlin@theblade.com or 419-724-6199.