New bankruptcy law makes lawyers expensive; some debtors aren’t bothering to hire one

The new Bankruptcy Abuse and Consumer Protection Act has had a number of effects on the financial industry as well as those suffering from problem debt. The new law, which went into effect in October 2005 has made some fundamental changes in the way that bankruptcy cases are handled by the courts. 

The first change is that filers must now pass a “means test” to determine if they can actually repay some or all of their debts. Should they fail the means test, they must file under Chapter 13 of the Federal bankruptcy code, which is far more cumbersome than the Chapter 7 filing that was previously used for almost all personal bankruptcy cases.

The second, and perhaps most significant, change is that lawyers are now held responsible for the truth of the documentation filed by their clients. This created a stampede of customers who wanted to file prior to the enactment of the new law, making the legal industry very, very busy. Those who do have time to take on new cases have raised their rates in order to cover their additional exposure to liability. Some attorneys have raised their fees by as much as 75% over what they were charging a year ago.

The result of these increases in hourly rates? Many filers are unwisely attempting to file for bankruptcy themselves, without the benefit of an experienced attorney. Some people may be able to do so; many in the business say that filing for bankruptcy is no more complicated than filing a tax return. Then again, H&R Block didn’t become rich watching the American public file their own tax returns, did they?

What sorts of problems can arise from filing yourself?

• You may lose property that you otherwise might have been able to keep, such as a car or a house
• You may have your case thrown out completely due to improperly filled-out paperwork.
• You can refile in that case, but your automatic stay, which protects you from creditors during your court proceedings, is reduced to a maximum of 30 days.

That doesn’t mean that some people cannot file correctly themselves, but the money saved by not hiring an attorney may be lost when the court hands down a judgment.

There are services available called “petition preparer” services, which are small companies, staffed by non-lawyers, that will help you prepare your paperwork for a modest fee. Some offer to help you file for as little as $100. Lawyers caution that you get what you pay for, so filers are urged to be careful.

All in all, we recommend that in the dire situation of having to declare yourself unable to pay your debts, you are probably better off in the hands of a capable attorney who has experience handling such cases. After all, you likely have no experience yourself and most people would prefer not to experience it again. Our advice? Hire a lawyer.

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