October 28, 2006 in Business

Bankruptcy law has wide reach

By The Spokesman-Review

Bankruptcy 101

Chapter 7: Debtors wipe out most debt, though some assets might be sold to repay a portion of what’s owed. In most cases, a debtor can keep his or her house and other belongings, but that varies by state.

Chapter 13: Debtors reorganize their finances under a court-supervised plan to repay creditors as much as possible over three to five years.

New rules: Last year’s bankruptcy legislation aimed to force a greater proportion of debtors into Chapter 13.

Source: Washington Post

More people are paying debts once considered insurmountable, or sinking further into financial despair across the Inland Northwest because of new federal bankruptcy laws enacted a year ago that make it tougher to wriggle out of financial obligations.

The law was hailed by some for reining in credit abuse and encouraging personal responsibility, but has been criticized by others as a way to reward banks, credit card companies and predatory lenders while squeezing the poor and vulnerable.

The new law, which went into effect on Oct. 17, 2005, calls for debtors to supply much more paperwork, such as pay stubs, tax returns, bills, and evidence of insurance costs, home and car payments and child support. It also requires financial counseling courses for debtors, and has resulted in more probing questions from bankruptcy trustees as cases progress.

Some lawyers in the Northwest have abandoned their bankruptcy work because of the more rigorous standards.

Perhaps the biggest change enacted by Congress, however, was an income-based test.

Those who earn more than their state’s median income, and who can pay at least $6,000 over five years, may not be able to use Chapter 7 and discharge most of their debts. Instead, they must file a Chapter 13 bankruptcy, which is designed to have people repay their debts.

In Washington, the median income for a single-person household is $44,092. The median income for a family of four is $72,103.

In Idaho, the median income for a single wage earner is $34,898; for a family of four, it’s $52,470.

Spokane bankruptcy attorney Lisa McBride said those state income figures are higher than local numbers, thus allowing people falling below those levels to file for bankruptcy with few problems.

“In some ways, the changes have been very favorable,” McBride said, noting that it’s not a bad scenario for people with good salaries to attempt pay their debts.

Consider the statistics: The number of Eastern Washington people or couples filing for Chapter 7 bankruptcy fell fivefold, to 2,110, in the last year. During the same time period a year earlier, 10,950 Chapter 7 cases were filed.

It’s much the same in Idaho, where 10,484 Chapter 7 cases were filed in all of 2005 compared to the 1,551 cases filed so far in 2006.

Across the country, there were 263,660 personal bankruptcies filed during the first half of the year. The number during the first six months of 2005 was 851,683, according to the American Bankruptcy Institute.

The 2005 numbers are a bit inflated, according to court officials, as people rushed to file in advance of the new legislation taking effect.

At Sacred Heart Medical Center, administrators are writing off fewer patient debts due to bankruptcy, said Kevin Walstrom, the hospital’s new chief financial officer.

It’s too early to tell if the changes in the law will offer a long-term solution to the problem of people not paying their medical bills, he said.

McBride predicts the new bankruptcy laws will shake out and people who genuinely need financial relief will be able to use the laws to escape crippling debts and start over.

“I think we’re starting to see that now,” she said.

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