People filing for bankruptcy will face more stringent
People who are thinking about filing for bankruptcy are usually weeks or even days away from having their homes seized, cars repossessed or worse, and starting Oct. 17, the paperwork process of having their debt wiped away will take even longer.
In order to file for bankruptcy under the new law, debtors must first attend a credit counseling session. The assessment of their income and debt will now be done with a means test, which will compare their income with the median for Californians, and those who don’t meet the new standards will have to file for Chapter 13 bankruptcy, which involves a five-year repayment plan. Those who do file for bankruptcy will also be responsible for attending mandatory finance management meetings after they’ve filed.
Attorney Shian MacLean has been helping desperate people in the South Valley file for bankruptcy since 1988, and after studying up on the new federal bankruptcy laws, he thinks it’s a step in the wrong direction.
“I think it’s a waste of time,” he said. “There has always been a lot of rules and safeguards in place and there has always been a lot of scrutiny of our clients by the courts.”
What frustrates MacLean is now when a client comes to his firm to file, that person must attend a mandatory credit counseling session as well as fill out more paperwork. The counseling session costs $50 and can take up to an hour. MacLean said this slows down the filing process, and for someone who is in a desperate situation, $50 for a counseling session is asking a lot.
“A lot of people are days away from having their homes or cars taken, or they’ve got medical bills so high they can’t even comprehend them, and now being able to help them out of that situation is going to take even longer,” he said. “Before a client would come in, and within a half an hour we could prepare a petition and now it could take days.”
While MacLean thinks the counseling is time consuming, Carmela Vignocchi, who works with the Consumer Credit Counseling Services office in Watsonville, says for the first time, the government is teaching people about finances and showing them that bankruptcy isn’t the only option.
“I think this is a unique opportunity for consumers to make sure they have all the information they need in order to make the best decision possible about what to do with their overwhelming debt,” she said. “Fifty-five percent of those who have filed didn’t know they had other options. The counselors will go over the alternatives, the consequences of filing for bankruptcy, and we’ll do a thorough budget analysis.”
Along with counseling, there have been new limitations placed on filing for personal bankruptcy, including barring those with above-the-median incomes from filing for Chapter 7 – where debts can be wiped out entirely – except under special circumstances. Those deemed by a “means test” to have at least $100 a month left over after paying certain debts and expenses will have to file a five-year repayment plan under the more restrictive Chapter 13 instead. Debtors will also have to file under the five-year repayment plan if they earn more than the state median income, which is $42,012 for a single person with no dependents, and $68,310 for a couple with two children.
Several people here in California and nationwide have been rushing to file bankruptcy before the new laws go into place. According to Lundquist Consulting, which tallies weekly bankruptcy statistics, U.S. courts received 102,863 bankruptcy filings last week – an average of more than 20,000 per day. The number of filings has jumped 19.4 percent year-to-date, from 1.23 million in 2004 to 1.47 million today.
Although the rules have changed regarding assessment of income, MacLean still feels confident that his firm, the Debt Doctors, will be able to help almost everyone who comes to them.
“It’s frustrating because this is going to make things more expensive for the client, who is already dealing with the stress of their situation,” MacLean said. “The filing fee will go up; they’ll have to pay for the counseling session; and attorney fees will go up because there is much more paper work to handle.”
Vignocchi agrees with MacLean that people who are filing for bankruptcy are in critical situations when it comes to money, but she believes that just like a driver who attends traffic school and learns from his or her mistakes, counseling services for debtors can be constructive.
“We have an opportunity here,” she said. “This is the first time the federal government has mandated financial education. Before someone’s debt is wiped, they have to learn financial management. They have a fresh start through bankruptcy, and our mission is to provide them with the tools for that fresh start. The world is a complex place, and no one was ever taught curriculum on personal finance.”
To reach Debt Doctors, call (831) 636-6666. To reach Consumer Credit Counseling Services, call (805) 383-7700 ext. 359.