Personal Bankruptcies Rise Ahead of New Laws

Attorneys who specialize in bankruptcy law already are seeing an increase in business following changes in U.S. regulations on personal bankruptcy. The new rules, which make it more difficult for individuals to file for Chapter 7, go into effect this fall.

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On Fridays, we talk about your money, and today the subject is bankruptcy. Upcoming changes to the nation's bankruptcy laws have sparked a temporary boom in bankruptcy filings. President Bush signed the new law last month. Many debtors are now hustling to file quickly before the changes take effect next fall. NPR's Scott Horsley reports.

SCOTT HORSLEY reporting:

Mark Miller is one of the busiest bankruptcy lawyers in San Diego, and these days, he's busier than ever. Miller has seen a definite spike in the number of clients seeking bankruptcy protection since it became clear this spring that changes were in store.

Mr. MARK MILLER (Bankruptcy Attorney): What we're seeing is that people are rushing in trying to get in before the law does change. And let's be honest about this. People do not want to be sitting across from me discussing their finances and, quite frankly, how their finances have gone into the toilet. They don't want to be discussing that, so I think this law was the sharp stick which is poking people to get out and get something done.

HORSLEY: Filings for Chapter 7 in San Diego jumped nearly 7 percent in March when the Senate passed the bankruptcy bill and another 8 percent in April when the House followed suit. Bankruptcy courts around the country have seen a similar increase. It's all the more striking since it comes after two years of steady decline in bankruptcies. The new rush for the courthouse does not surprise law professor David Skeel. He studies bankruptcy at the University of Pennsylvania.

Professor DAVID SKEEL (University of Pennsylvania): The one thing that's quite clear about this bill is that it's going to make it more costly and more of a hassle to file for bankruptcy. So if you've been thinking about filing for bankruptcy, it would be silly not to file now rather than later.

HORSLEY: Last year, more than one and a half million people filed for bankruptcy. Most filed under Chapter 7, which allowed them to erase their debt. The new law will force more debtors into Chapter 13, which puts them on a repayment plan instead. The law also requires bankruptcy attorneys to certify the accuracy of their filings, and Skeel says that will likely add to client's costs.

Prof. SKEEL: This is going to make filing a bankruptcy case more expensive for attorneys, and they're going to pass that cost on to the people filing for bankruptcy.

HORSLEY: All of that has created a sense of urgency for debtors as they try to beat the mid-October deadline. Attorney Stephen Elias just co-authored a book called "How to File for Chapter 7 Bankruptcy." Despite the book's limited shelf life, he expects big sales. Elias has already seen a jump in his own bankruptcy practice in Northern California.

Mr. STEPHEN ELIAS (Attorney): I mean, I'm in a rural area, a small town, and I've been getting from maybe one a week, I'm getting three or four a week now. And I expect that to pick up as--there's going to be a lot of advertising, heavy advertising.

HORSLEY: Some lawyers are already running ads about the new law, and more will likely follow. Observers expect the surge in bankruptcy filing to continue until the new law takes effect on October 17th. A bigger question is what happens after that. Many forecasters expect the number of bankruptcy filings to taper off as it gets more expensive and more difficult to eliminate one's debts. But Professor Skeel says credit card companies and other lenders might take advantage of the tougher law to become even more aggressive in extending credit.

Prof. SKEEL: So it's quite possible that the decrease in filings that you might otherwise expect might be offset by lots of new debtors with lots of new credit, some of whom are going to wind up in bankruptcy.

HORSLEY: Skeel admits, it's hard to imagine mailboxes stuffed with even more credit card offers, but he says the history of lending America suggests some people will always borrow more money, even if they shouldn't. Scott Horsley, NPR News, San Diego.

MONTAGNE: From NPR News, this is MORNING EDITION.

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STEVE INSKEEP (Host): I'm Steve Inskeep.

MONTAGNE: And I'm Renee Montagne.

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