Bankruptcy Filings Soar Ahead of New Law

Consumers racing to beat the bankruptcy clock are out of time. Today, the long-awaited new bankruptcy law takes effect - making it more difficult for individuals to file Chapter 7.

Based on preliminary data for the week ending Oct. 15, researchers at Lundquist Consulting estimate there will be more than 200,000 personal bankruptcy filings. That’s nearly triple the number of filings in the week ending Oct. 1, which itself was a record high. Americans filed an average of 30,000 a week in the past four years.

The new law is designed to make it tougher for individuals to file for Chapter 7 bankruptcy, which eliminates most debts. Those with incomes exceeding their state’s median could be required to file under Chapter 13, which requires debtors to repay creditors under a schedule established by the courts. Consumers still eligible for Chapter 7 will be forced to undergo credit counseling and will pay more to file.

Meanwhile, the Justice Department’s U.S. Trustee Program, which oversees the nation’s bankruptcy courts, has so far approved 41 applications to provide the education and counseling required under the new law. Jane Limprecht, with the Trustee Program, expects additional approvals will be granted soon.

Wednesday, the Internal Revenue Service announced it could revoke the tax-exempt status of about 20 counseling firms, which raises concerns that there will not be enough bankruptcy court-approved counseling firms to provide debtors the necessary advisory services. The IRS believes many of the non-profit counselors are misusing their tax-exempt status by pressuring consumers to simply enroll in debt-management plans - with fees siphoned off to for-profit companies controlled by the firm’s executives.

Ultimately, with bankruptcy filings expected to drop sharply starting next week, concerns about a possible shortage of counselors may be eased.