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Study Finds Bankruptcy Reform Increased Costs for Filers and Recoveries for Creditors

September 3, 2010

As Chino consumer bankruptcy attorneys, we have always had doubts about the 2005 bankruptcy reform law. Intended to curb abuses of the bankruptcy system, it raised fees, imposed a "means test" for Chapter 7 eligibility, required credit counseling before filing and more. Now, as the Wall Street Journal's Bankruptcy Beat blog noted Aug. 27, the American Bankruptcy Institute Law Review has published a study noting a presumably unintended consequence of the law: Bankruptcy is now up to 55 percent more expensive for the debtors than it was before the change. The study was conducted by bankruptcy attorney and law professor Lois R. Lupica and sponsored by the American Bankruptcy Institute and the National Conference of Bankruptcy Judges.

This was actually a "pilot" study -- a look at 2,000 cases across bankruptcy districts in six states. The full study, due in 2011, will expand that to 10,000 cases in 90 bankruptcy districts. Lupica cautioned that the broader study will be more reliable, but told the Journal that she had no doubt that the bankruptcy reform law had raised costs for everyone involved. Among individuals and couples filing for Chapter 13 bankruptcy, a press release noted, the median cost was $2,930 in 2003 and 2004, before the Bankruptcy Abuse Protection and Consumer Protection Act. That median price jumped to $4,077 in 2007 and 2008. Among Chapter 7 filers, the costs in the same period went from $900 to $1,399. The study found that those costs are passed along to trustees, attorneys and creditors, in the form of time as well as money. Lupica said this was a direct result of requirements that cost money and time, such as credit education courses.

Our Fullerton individual bankruptcy lawyers do not believe a study is required to see this. Of course, most people go into bankruptcy without a lot of extra money, so every dollar they have to spend counts. In the press release, Lupica said the increased costs may have driven down the total number of bankruptcy filings. Post-reform filings are still below their pre-reform peak, even though they are currently at all-time post-reform highs. If this is a direct result of the reform law, we think it's a shame that the law has effectively taken away some people's access to bankruptcy. Bankruptcy is not a first resort, but for some filers, it's the smartest way to handle a financial situation that is not sustainable. Without it, the poorest may continue to suffer from ruined credit and constant debt collection calls without any means of starting over and rebuilding. And of course, requirements that raise costs also take away money that could be used to pay off creditors.

Howard Law PC helps individuals and married couples throughout California navigate the bankruptcy process, from start to finish. When clients first come to us, one of the first things we do is sit down and examine their finances to ensure that they really are good candidates for bankruptcy, and if so, what kind. Our Lake Forest personal bankruptcy attorneys then help clients through the financially, legally and sometimes emotionally difficult bankruptcy process itself, ensuring that they file in a way that protects them maximally from creditors and future financial problems. Whenever necessary, we also take legal action to protect our clients from creditors who violate the automatic stay, suing them for financial damages as well as to stop the harassment. And in every case, we make sure our clients understand the implications of their bankruptcies for taxes, credit scores and other major areas of their financial lives.

If you're so deep in debt that you don't believe you can ever get out, you should call Howard Law to discuss whether a bankruptcy is your best choice. To learn more or set up a free consultation, contact us through our website or call 1-800-872-5925.