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Experts Concerned That Bankruptcy Is Unavailable to Some in Financial Distress

June 16, 2010

As San Bernardino consumer bankruptcy lawyers, we are closely following the unprecedented growth in bankruptcy filings for individuals and couples. The American Bankruptcy Institute predicts a record number of filings this year, enough to break last year's record for number of filings since the 2005 bankruptcy reform law. But according to a June 9 article from USA Today, bankruptcy filings might be even higher if bankruptcy were an option for more people. Experts in the article say that because bankruptcy doesn't allow the discharge of all kinds of debts, some get no benefit from filing. Other people in financial distress don't file because they cannot afford it. In either case, the article said, some experts believe such people have gone into "informal bankruptcy" without the legal protections of a proper bankruptcy.

The article describes several groups who can't benefit from filing for bankruptcy. One is people with a large amount of student loan debt, especially debt on private rather than federal student loans. Student loans are not dischargeable in bankruptcy unless the filer can show "undue hardship." This rule once applied only to government loans, but was changed to include all student loans -- including unregulated, high-interest private loans -- during the 2005 bankruptcy reform. Proving undue hardship requires an extra trial and lots of extra expense with no guarantee of success. Congress is considering making private student loans once again dischargeable, with predictable blowback from the financial industry.

Another group is simply too financially strapped to pay for bankruptcy filing. According to the article, the 2005 law added more requirements that drive up costs, and attorney and filing fees have also risen. According to one academic paper, these costs keep all but a fraction of potential filers from pursuing a bankruptcy. Unfortunately, delaying a bankruptcy can create even more financial problems for debtors and rob them of resources they need to make a fresh start. Free legal services and fee waivers are out there, but the recession has made both harder to get than they already were.

Finally, the article notes that bankruptcy filing also cannot usually save a home that is threatened by foreclosure. Since the 1970s, bankruptcy law has allowed judges to reduce the principal on any loan but the loan on a primary home -- including loans for vacation homes, boats and other luxury items. An attempt to change the law back failed in Congress last year. A new federal rule forbids lenders from turning down loan modification requests solely because the borrower has also filed for bankruptcy, but borrowers in trouble still cannot turn to bankruptcy to keep their homes.

We are pleased that this article is calling attention to some of the major flaws of bankruptcy law. As Fullerton individual bankruptcy attorneys, we see those flaws firsthand because we work with bankruptcy law and bankruptcy clients every day. The 2005 law was ostensibly intended to reform the bankruptcy process to curb abuses of the system, but many observers believed that the real goal was to discourage bankruptcies, by making effective ones harder to get and more expensive. This article suggests that at least to some extent, those critics were right -- bankruptcies are out of reach for some people who are in real financial trouble. That's a shame and a missed opportunity for our legal system to do some good for vulnerable Americans.

At Howard Law PC, we help people in financial distress work their way back to security through bankruptcy, loan modifications and other legal means. Our Aliso Viejo personal bankruptcy lawyers start each case by combing through the client's financial profile to determine whether bankruptcy is really that person's best option. If it is, we can counsel clients on what a bankruptcy will mean for their credit, taxes and other parts of their financial lives. We stand by our clients throughout the logistically and sometimes emotionally difficult process, helping them choose the right type of bankruptcy for their needs; follow through on their liquidation or payment plans; and fight back against any creditors who violate the automatic stay. Our goal is always to leave clients in a better financial situation than when they started, with the tools they need to build a healthier financial life.

If you feel overwhelmed by your debt and you're considering bankruptcy as a way out, you should talk to Howard Law right away. To set up a free, confidential consultation, send us an email or call 1-800-872-5925 toll-free.