Much has been written about the changes to Chapter 7 and Chapter 13 practice and procedure in the months since the new bankruptcy law went into effect. From my perspective as a debtor’s lawyer, one of the biggest practical changes that I have faced arises from a significant increase in the amount of work that is involved in preparing a case on behalf of a client.
Under the old law, we used a “best efforts” + “good faith” analysis. I sometimes put relatively wealthy debtors into Chapter 7 cases and had little problem with discharge. I recall distinctly filing a Chapter 7 case for a physician who earned well over $100,000 but who had numerous expenses for his children’s private school, college education and special medical needs. More frequently, I received referrals from other lawyers that involved families earning $70,000 to $90,000 who were living in a $300,000 house and who had cash flow problems. These cases were generally not a problem.
Under the new law, we can no longer argue for a general “best efforts” bankruptcy. IRS tax collection standards tell us what is “reasonable” and whether a debtor can fit within a Chapter 7 or Chapter 13.
Preparation of the cases has also undergone a significant change. We now have to document household earnings, budgets and expenses. Those cases on the edge – where families are earning slightly more than the mean income for their family size – almost always require meetings with the U.S. Trustee and significant time expenditures.
Because the document gathering and information verification procedures have become much more burdensome, the attorney fee cost for filing bankruptcy has gone up as well. Even a basic, seemingly straightforward case, requires twice as much time as the same case would have required pre-BAPCA.
Chapter 13, in particular, has become significantly more burdensome. Under the old law, when a debtor filed a Chapter 13, we set out a budget that provided for a reasonable lifestyle. There was no income verification to speak of and once a case was filed, no one looked too closely at increases to household income over the course of three to five years.
Although I have seen no statistics to support my contention, I suspect that very few Chapter 13 debtors were taking advantage of the old system. Even though the old law did not set out budget limits per se, there was no way to build in one-time expenses like a flight across the country to attend a funeral or unexpected car repairs.
The new law, however, not only does mandate what constitutes reasonable monthly spending, but it gives debtors even less wiggle room for those unexpected expenditures. As debtor’s attorneys, we have to squeeze our clients into extremely tight budgets and we have to adjust those budgets to wring out every last penny in the event of a raise or bonus.
The practical implications of this change has been that debtors face more motions for relief, motions to dismiss and require much more of the attorney’s time.
To their credit, the bankruptcy judges of the Northern District of Georgia have recognized that debtor’s attorneys have significantly more responsibilites under the new law. In years past, the bankruptcy judges effectively limited attorney’s fees in Chapter 13 cases through a standing Order. The most recent Order permitted a “no look” fee of $2,500.
As of October, 2006, there is a new standing order regarding attorney’s fees that permits debtor’s counsel to use our best judgment in charging a fee that is appropriate for a particular debtor’s situation. Most experienced debtor’s lawyers are setting fees in the $4000 to $5,000 range. Most of these fees, of course, are paid through the Chapter 13 plan, but the debtor ultimately has to bear the cost.
Besides increased attorney’s fees, the filing fee paid to the court has gone up and is expected to go up again. Currently, the Chapter 7 filing fee is $335 and Chapter 13 is $310. By contrast, when I started practicing bankruptcy law 20 years ago, the filing fee for Chapter 13 cases was $90.
So, as a practical matter, one of the most significant effects of the new bankruptcy law has been to make the filing of a bankruptcy case significantly more expensive both in terms of attorney fee cost and filing fee cost. I have no doubt that this cost issue was an expected consequence of the new law and is part of the underlying policy to discourage bankruptcy filings.
Perhaps our new Congress will address the source of bankruptcy problem in this country – the over-availability of debt and the absence of consequence to lenders who extend credit to non-debt-worthy customers. I will not, however, be holding my breath.