Bankruptcy Act

Critics Say New Law Would Be a Hardship on All Parties

New York Law Journal
Long Island Weekly
By Andrew Harris

MINEOLA – With Congress’ passage of a massive overhaul of federal bankruptcy laws last week, Long Island debtors’ and creditors’ attorneys are bracing for the impact.

Ninety-nine percent of all bankruptcies filed in the Eastern District of New York last year were personal bankruptcies.  More than 80 percent of those were brought by consumers seeking to wipe out debts under the U.S. Bankruptcy Code’s Chapter 7 which, for the first time, will contain a debtors’ means test.

Under the test, Chapter 7 debtors who are adjudged to have too much disposable income will be subject to having their cases converted to Chapter 13, meaning that they will have to repay at least some of their debt pursuant to a five-year plan.

In Nassau and Suffolk counties, both debtors’ and creditors’ attorneys criticized the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, saying it and other reforms will create difficulties for debtors, bankruptcy lawyers and judges.

For the judiciary, those troubles are expected to surface as judges across the country begin to interpret and apply the new statutes and create new precedents.

For debtors, in addition to instituting the means test, the revisions include a requirement that they obtain prefiling debt counseling and an attorney certification requirement that lawyers say may deter some of their colleagues from continuing to practice in the field.

The new certification clause requires debtors’ lawyers to swear that they have “no knowledge after an inquiry that the information in the schedules filed with the petition is incorrect.”

“The way it’s worded, attorneys have potential personal liability” if a filing is found to be inaccurate or is adjudged abusive, debtors’ lawyer Richard G. Gertler said.  Noting that the typical fee for filing a personal bankruptcy is between $1,000 and $2,000, he also said that with the introduction of personal liability for lawyers, the small fees may not be worth the risk.

“Certification is going to drive a lot of lawyers out of the business,” predicted Mr. Gertler, a partner in Thaler & Gertler of Westbury.  “Those who are going to stay are just going to have to sweat it out each time they file a petition.”

But not everyone is unhappy with the reforms.  Todd E. Hauslanger, who runs a boutique law firm in Huntington and represents collection agencies, banks and Cablevision, says current bankruptcy laws are inadequate.

“I continuously see abuses of the system,” he said.  Those abuses, Mr. Hauslanger said, include debtors who run up credit card debt and then use a Chapter 7 discharge to “eliminate their responsibility without dire need or exigent circumstances.”

Complaining that debtors have long utilized the system to make it cost-ineffective for creditors to challenge them, he said the new measures will protect creditors from having to spend thousands of dollars to recoup relatively small balances owed.

Slight Uptick

Although the number of personal bankruptcy filings declined nationally last year, they rose slightly in the Eastern District, which includes Kings, Queens, Richmond, Nassau and Suffolk counties.

Last year, there were 26,446 bankruptcies filed in the Eastern District, according to U.S. Administrative Office of the Courts.  That figure represents a slight uptick from 2003, when 25,950 cases were filed.

Overwhelmingly, the bulk of the 2004 filings were by consumers.  Just 293 of the cases in the district were filed by businesses.  Of the 26,153 petitions brought by consumers, 21,428 sought Chapter 7 liquidation, under which a debtors’ assets are sold to pay off secured creditors and, typically unsecured debt such as credit card balances, are wiped out.

More than 4,700 sought consumer debt adjustment under Chapter 13, under which, with court approval, debtors seeking to keep their assets formulate a three-to-five year plan to repay their secured creditors in full and repay at least a percentage of their unsecured debt.

Finally, 14 qualified for Chapter 11 treatment.  The bankruptcy code’s reorganization provision, Chapter 11 is typically used by businesses.

Certification Clause

Leslie A. Berkoff, a creditors’ attorney, agreed with Mr. Gertler that the act’s attorney certification clause will increase the personal liability of bankruptcy lawyers.

Exposure above and beyond U.S. Bankruptcy Rule 9011, which already provides a mechanism for sanctioning attorney misconduct, “is going to change the face of the practice for a lot of attorneys on Long Island,” said Ms. Berkoff, a partner in Garden City’s Moritt Hock Hamroff & Horowitz.  “You may get some of the better practitioners stepping out of the filed because it’s difficult to protect themselves.”

Mr. Gertler’s partner, Andrew Thaler, a Chapter 7 panel trustee, said he sees nothing positive in the act.

The new laws, he opined, will punish people who want to pay their bills, but are beset by the loss of a job or health crisis.

Only a very slight percentage of bankruptcy filers are serial abusers of the system, Mr. Thaler said.  In that light, he added, the new means test is tantamount to “using an elephant gun to kill an ant.”

The means test pegs a Chapter 7 debtor’s eligibility to his or hers earnings, as measured against the median incomes in the states in which the debtor lives.  Those whose earnings are $100 per month above the median-after certain allowed deductions-will likely have their cases converted from Chapter 7 liquidation to Chapter 13 adjustment.

Under Chapter 13, those filers would be forced to repay a percentage of the money they owe, every month, for five years.

If no creditor challenges a Chapter 7 petition under the new “abuse grounds” codified in U.S. Bankruptcy Code §707(b), that duty devolves upon the court-appointed trustee.

Mr. Thaler, who receives a $60 stipend for every case he reviews as trustee, said the rules change would mean more work for him and for bankruptcy court judges.

“Chapter 13 is so difficult,” Mr. Gertler said, adding that only a fraction of debtor’s plans-about 20 percent are even confirmed by the court.

Confirmation comes when filers have sufficient means to pay their unsecured creditors more money than they would otherwise receive if the debtor’s estatewas liquidated under Chapter 7.

Mr. Gertler said that although he agrees that the bankruptcy law needed to be tightened up, “there’s got to be a way to encourage people to repay their debt.”

Mr. Gertler also said he believes that the legislators who drew up the new act did not consult with bankruptcy practitioners.

Craig D. Robins, another Westbury bankruptcy lawyer, agreed.

“The bill is very flawed,” he said.  “Legislators don’t have a hands-on feeling for the process.”

Mr. Robins asserted that the legislation, which was nearly passed in September 2001, was driven in large part by credit card companies and banks.  Consumers, he opined, were “under-represented.”

Ms. Berkoff said that in general the new act will be “a windfall for creditors.”

“It’s going to make it harder for people to walk away from their debts,” she said.  “But it’s also going to make it harder for people who have means not to pay something.”

She added, “It will be easier for me to collect money for my clients, but I think it’s going to hurt the honest debtor.”

The honest debtors, Mr. Gertler said, make up a vast majority of those who file for bankruptcy out of necessity.  He identified them as “the working poor trying to make ends meet, especially in the Eastern District of New York where there’s a high standard of living.”

The Vote

Last month, The U.S. Senate approved the act by a 74-to-25 vote.  Senator Hillary Clinton did not vote on the measure; Senator Charles Schumer opposed it.

On Thursday, the House of Representatives approved the act, 302 to 126.  Three of Long Island’s five House members, Carolyn McCarthy (D-Mineola), Steve Israel (D-Huntington) and Peter King (R-Seaford) voted for the bill.  Gary Ackerman (D-Bayside) and Timothy Bishop (D-Southampton) opposed it.

President George W. Bush is expected to sign the law, which would go into effect six months later.

-Andrew Harris can be reached at aharris@alm.com.