Las Vegas Business Press :: News : Bankruptcy law could mean fewer lawyers

Bankruptcy law could mean fewer lawyers

BY VALERIE MILLER
BUSINESS PRESS

New rules taking effect today could shrink the number of bankruptcy lawyers and increase costs for those seeking debt relief.

But while some debtors' attorneys say tougher filing requirements and increased liability could force them out of the field, credit counseling agencies are prepared for a boom in business.

Under the new bankruptcy law, debtors must pass a means test before being allowed to file for Chapter 7 protection. Their legal representation will be required to vouch for the client's disclosure of income and assets, and could be penalized if the information is incorrect. The mandatory verification means added expense. One Las Vegas lawyer said he wouldn't be surprised to see the cost of a consumer bankruptcy double once the full impact of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 is felt.

Las Vegas bankruptcy attorney Philip Goldstein counsels a client, who is also one of his employees. The lawyer plans to continue helping clients file Chapter 7 bankruptcies.

"The average bankruptcies used to go for about $700 and they've gone to just over $1,000 right now, in the last three months," bankruptcy attorney Philip Goldstein said. "After the new law, I think the average case will go up to between $1,000 and $1,500."

While Goldstein represents debtors, at least one creditor's attorney concurred.

"The burden on the debtor's counsel has increased because they are now debt-relief agencies (under the new law)," said Candace Carlyon, whose clients include Community Bank of Nevada, BankWest of Nevada and Silver State Bank. "There is absolutely no doubt in my mind that it will increase the costs for the individual."

Aside from the extra cost, the redefinition of the role of bankruptcy attorneys under the new law will alter the attorney-client relationship, said one local lawyer who represents debtors.

"Now attorneys will have to check up on the clients," Nancy Allf said. "This provision is huge. How can you determine what is a 'reasonable inquiry'? What if a person hides money in Maine or inherits money and property, and doesn't want to liquidate it?"

Allf is among those attorneys calling it quits when it comes to handling the most popular form of personal bankruptcy, Chapter 7.

The State Bar of Nevada will hold educational seminars on the new law in the spring with the help of judges, said Shelley Krohn, who heads the State Bar's bankruptcy section. She fears the number of lawyers doing bankruptcies will dwindle.

"I know of three that have already made that statement," Krohn said. There are about 200 lawyers in Las Vegas who practice in the field either part- or full-time, she added.

The verification rule isn't the only barrier put up by the new law, attorneys say. The strict means test for qualifying for Chapter 7 also presents a problem for filers. It requires that the Internal Revenue Service standard be used to determine a person's living expenses, instead of the actual expenses used under the old law. Under the means test, if a person is found to have more than $100 a month left over after expenses, he would be shifted into a Chapter 13.

That type of bankruptcy requires a repayment plan for some debt and will take five years to discharge. Chapter 7, by contrast, can take as little as 90 days to discharge. It also wipes out most unsecured debt, such as credit card and medical bills. Debts secured by cars and property can be cleared under Chapter 7 if the debtor gives back the collateral.

Bankruptcy filers have not lost sight of the coming changes. A rush of last-minute filings kept some attorneys working seven days a week in the period leading up to the old law's Oct. 18 expiration. Midway through last week, Goldstein's office reported 60 new filings in just a few days. The office normally does 60 filings in an entire month.

That activity was reflected in last month's bankruptcy figures, both statewide and locally. Chapter 7 filings in Nevada have more than doubled from a year ago at this time, rising from 1,018 in September 2004 to 2,336 last month. In Las Vegas, Chapter 7 filings grew 133 percent year over year. There were 1,706 cases filed this September, compared with 756 in the same month a year ago.

COUNSELING BOOM

Meanwhile, credit counseling agencies are putting out their "Help Wanted" signs to brace for an influx of business. The new law's mandatory pre-filing credit counseling and pre-discharge education for debtors have prompted a hiring surge.

"We have 130 counselors and 11 that are specifically to do only this type of counseling. We are budgeted to hire up to 60 more," said Courtney Scruggs, Green Path Debt Solutions' marketing specialist. The Farmington Hills, Mich.-based company was the only company at press time to be approved in Nevada for both credit counseling and debtor education.

A total of four agencies had been approved for debtor education in the Silver State by last week. The credit counseling list for Nevada included five agencies. There is no deadline for applying for either certification.

Consumer Credit Counseling Services of Southern Nevada was still waiting last week for its approval from the U.S. trustee, but its president and CEO, Michele Johnson, was confident her agency would receive the nod. To prepare for it, she has added employees. "We are staffing up for the next quarter and hiring another six," Johnson explained. "We have hired three already."

The agencies are charging about $50 for credit counseling, which has to be at least one session. As part of the process, the debtor discloses his financial information to the counselor, who prepares a financial management plan for the client. Green Path will charge another $50 for debtor education, according to Scruggs.

With Nevada consistently showing one of the highest personal bankruptcy rates in the nation, if would seem like a boom for credit counseling agencies to have all that guaranteed business. But not so, said David Jones, head of the Virginia-based Association of Independent Credit Counseling Agencies. He said the new law won't generate a lot of actual revenue for the agencies.

"I don't know if it will improve at all," Jones said. "The great number of people will just need a counseling session, get a certificate and file bankruptcy."

UNLV Boyd School of Law Professor Robert Lawless is concerned that the steady stream of clients for credit counseling agencies could lead to less-than-reputable organizations opening their doors. "I think you could have a whole industry springing up overnight," he said. "I don't know that there is going to be abuse, but the potential is there. Last year, there were 1.25 million consumers that filed for bankruptcy, and now all of those would need credit counseling."

Lawless, who has studied the effects of the bankruptcy law on consumers and businesses, finds little good in it. "The credit counseling is a hassle for consumers," the professor said. "I think the biggest overall change is going to be the lack of access to counsel and the higher attorney fees. I think being a bankruptcy attorney is going to be less attractive."

Getting certified as a counselor, however, is proving attractive for credit counseling agencies. Fewer than 50 organizations had been approved nationwide just before the law took effect but 200 more are seeking approval, Jones said.

Not just any company can qualify. The operations must be nonprofit and have at least two years of experience offering that type of service in order to be approved by the U.S. Bankruptcy Trustee's office. August Landis, the Nevada assistant U.S. trustee, said the approvals go through the Washington, D.C. office.

The trustee's Web site lists in-person visits, telephone calls and the Internet as venues through which a person can do counseling. Green Path, for example, has only phone service available in Nevada. Consumer Credit Counseling's Johnson said that an in-person visit is usually more productive for clients. Her agency has offices in Las Vegas.

"When you can look at someone, their body language comes into play," she said. "You know if they are indicating that they have other questions that weren't verbalized."

BUSINESS ISSUES

Businesses won't find the problems that consumers do when trying to file for bankruptcy under the new law. Lawless warns that the problems will come after the business filing is done.

"There are provisions that make it harder for businesses to get through Chapter 11 and there are expanded paperwork requirements," he said.

"Small businesses will have to keep records that they wouldn't normally have to keep." It is with small businesses that the line is blurred, Lawless said. His research found that one in seven consumer filers will have a business reason. Often, this is because they are required to guarantee their business loan to creditors.

Under the new law, the timetable for a reorganization plan is 210 days, while under the old law, "you could continue to get stays indefinitely if you could show you were making progress," attorney Carlyon explained.

While critics have said the strict new bankruptcy law could stifle the entrepreneurial spirit, Nevada Small Business Development Center Deputy State Director Michael Graham disagreed.

"It hurts everybody when somebody declares bankruptcy," Graham insisted. "It is harder on small businesses, no doubt, because they have fewer people to spread the work out of collection. It used to be that people would declare Chapter 7 and walk away from it. The objective of the new law is that people don't walk away from it and leave other people holding the bag."

vmiller@lvpress.com | 702-871-6780 x331

KEY POINTS OF THE BANKRUPTCY ABUSE PREVENTION AND CONSUMER PROTECTION ACT OF 2005

* Means Test for Chapter 7 Eligibility: Under the new act, the U.S. Trustee, or any creditor, can bring a motion to dismiss a bankruptcy case if the debtor's income is greater than the state's median income. A debtor's living expenses, including transportation and housing, are determined by what's allowed under Internal Revenue Service rules. Under the old law, the debtor's actual expenses were taken into account in determining who qualified to file for Chapter 7. Under the new law, abuse of the bankruptcy law is presumed if the debtor's current monthly income, minus allowed deductions, is greater than $100. Debtors who meet this new standard would be put into a 5-year repayment plan under Chapter 13.

* Mandatory Credit Counseling and Debtor Education: No individual debtor may file for bankruptcy unless he or she has received credit counseling from an agency approved by the U.S. Trustee within the past 180 days. The court may not grant discharge of a bankruptcy unless the debtor has completed an educational course approved by the Trustee in personal financial management and a debtor can be denied discharge if he fails to complete the course. The old law did not require any counseling or education.

* Serial Filings: A Chapter 13 bankruptcy discharge will not be granted if the debtor obtained a discharge in Chapter 7, 11 or 12 in the four years before filing the current case. If the previous filing was a Chapter 13, the discharge must be more than two years prior to the pending Chapter 13 case.

* Homestead Exemption: Under the new law, debtors must live in their state or residence for 730 days prior to taking local exemption. Any move during that two-year period means a debtor's residency is deemed to be the state in which he or she spent most of the 180 days before that period. Nevada allows a $350,000 exemption.

* Attorney Verification: Debtors' attorneys must make a "reasonable inquiry" to confirm that the information given by their clients is accurate and truthful. Attorneys can be ordered to pay fees and penalties if the court decides they did not make reasonable verification efforts.

* Mandatory Tax Return Filings: These are required under the new law. The debtor must provide a copy of his or her most recent tax return, or a transcript of it, seven days before meeting with creditors or the case will be dismissed. The information must be provided to any creditor who requests it. Tax returns for the last four years must also be filed before filing for Chapter 13 bankruptcy.

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