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New law's impact: Bankruptcy filings down, but last-minute rush credited

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The number of consumer bankruptcy filings has fallen dramatically since new legislation went into effect last October. But the decline isn't necessarily a byproduct of the law's new stricter standards, instead the result of a diminished pool of candidates.

"We had five months' worth of cases filed in one month," said John Colwell, owner of San Diego's Debt Relief Legal Clinic. "There's no question that we really kind of dried out the system for potential cases."

"Filings are substantially down, unquestionably, but it's a little difficult to attribute that just to the new law," agreed San Diego bankruptcy attorney Michael O'Halloran, who represents debtors. "The big stampede of last October accelerated people who would have filed to this point."

As people rushed to file under the old qualifications, a total of 5,071 bankruptcy filings were made in San Diego County last October -- more than five times the previous October.

Less than 600 cases were filed in the ensuring four months.

"It (the new legislation) drove a lot of people who would've never declared bankruptcy into bankruptcy and got some people to file earlier then they would have," said Corrine Cooper, a former law professor who recently co-authored a book on attorney liability under the new bankruptcy law.

The average monthly Chapter 7 filings in San Diego County so far in 2006 is down more than 1,000 from the 1,298 a month that were filed in 2005.

A total of 925 cases a month were filed in 2004 and 971 in 2003.

While Colwell believes those numbers will eventually rise, he's still fearful that qualified candidates will stay away.

"Bankruptcy for those that need it is still available," he said. "There's an impression by the public that bankruptcy isn't available at all, so we may have overstated the danger or need to file bankruptcy by the deadline of Oct. 16."

One of the biggest changes in bankruptcy law is the addition of a means test, Colwell said, where individuals have to plug in their income from the prior six months and their tax returns from the previous four years into a formula.

"We're finding out a vast majority of people still pass the test," he said. "The test is really ineffective and adds costs to the system. Big picture wise, it's really hurting the little guys, the very poor and destitute who can't afford high attorney's fees and school costs.

"We felt there's no real need for this kind of heavy-handed approach to changes in bankruptcy law because the number of people gaming the system was quite small."

Most agree that the changes in the law have driven up the cost of filing for bankruptcy and made the process more complicated.

Because of the rise in costs, individuals have been forced to file without the help of a lawyer. Unfortunately, this has resulted in a large number of cases being dismissed.

And once a case has been dismissed, that individual has a much more difficult time reapplying.

"People are being excluded from the bankruptcy process, which many thought was the intended goal," said Margaret Mann, a bankruptcy attorney in the San Diego office of Heller Ehrman LLP.

Businesses are also having a more difficult time filing Chapter 11.

"On the corporate side, it hasn't been around long enough to have a reliable track record," Mann said, adding however, "Cases are having to proceed more quickly and in a timeframe which leads to higher chance of failure."

Cooper said most creditor law firms have stopped doing pro bono bankruptcy because of concerns about liability.

"Creditor law firms who represent small businesses and mom and pop stores are beginning to understand that they fall within debt relief agency language of the law," she said.

Debt relief agencies have to follow certain guidelines, including advertising themselves as a debt relief agency.

As complicated as the law is for consumers and businesses, lawyers and judges also are struggling to understand the meaning of the new legislation.

"It's very hard to understand because its poorly written and the forms are very complex," O'Halloran said.

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