Bankruptcy Reform Becomes Law

President Bush signed sweeping bankruptcy reform legislation into law this week, which will take effect on October 17, 2005. We should expect a major increase in filings before then. The legislation will make it more difficult for consumers to qualify for Chapter 7 relief, make more debts nondischargeable, and subject debtor's attorneys to sanctions for failing to verify the accuracy of bankruptcy petitions.

Under the law, a debtor must pass a "means test" in order to file for bankruptcy under Chapter 7 of the bankruptcy Code. This means that more people will have to file under Chapter 13, which makes them responsible to repay at least a portion of their debts to creditors.

In addition, bankruptcy lawyers are now "debt relief agencies," and must advertise that fact. The language here is quite broad and may include attorneys who represent creditors and any attorney who might advise someone about bankruptcy, such as divorce attorneys. Further, attorneys must investigate the circumstances that gave rise to the debtor's filing, and his signature on the petition is certification that he has determined that the petition is well grounded in fact and warranted by existing law, and has no knowledge that the information in the petition is incorrect. This is scary.

These law changes are going to mean that bankruptcy will be significantly more expensive for the consumer. More will be forced to repay at least a portion of their debts, whereas under the old law they could walk away from it. Attorneys will charge more to handle the cases because of the added complexity of the law and because of the risk of liability they face.