Regional impact of the new US bankruptcy law

Signed this week, the bill is the biggest rewrite of bankruptcy code in 25 years. But can it really teach old wallets new tricks?

In a typical month, consumer bankruptcy attorney J. Thomas Black files anywhere from 25 to 50 new cases. But prior to President Bush signing the new bankruptcy bill into law this week, he had already set a personal record for monthly filings: 65 in the first two weeks of April.

"I think the bill is pretty mean-spirited and pretty wrong-headed, and I am encouraging my clients to file in advance of it," says the Houston attorney.

While some of the provisions kicked in Wednesday, most will take effect in six months. And bankruptcy lawyers nationwide are working overtime to help people file as soon as possible.

Proponents of the plan hope it will lower bankruptcy rates at every level - national, regional, and state.

Filing rates are affected by everything from a state's exemption and consumer-protection laws, to its unemployment rates, to its health-insurance rates. But local culture also plays a significant role, say experts.

The Deep South, for instance, tends to have higher rates of bankruptcy filings than, say, New England. That may be because Southern states have traditionally been poorer. It might also be because it is harder to garnish wages in these states. Or it might be because there is less stigma in filing for bankruptcy. In other words, it is a much more accepted part of the culture.

"Culture definitely has to be part of the equation," says Jay Westbrook, a professor at the University of Texas Law School and author of a study on local legal culture and bankruptcy.

Culture, of course doesn't change for every new law, but some subtle shifts in regional bankruptcy trends seem likely.

Certainly, states like Texas and Florida, with extremely generous homestead-exemption laws, can no longer be used as last-minute safe havens for filers: A provision of the new bill says a person must now live in a state two years before receiving the benefits of that state's personal-property exemptions.

In the view of Nancy Rapoport, dean of the University of Houston Law Center and a bankruptcy expert, that may be the only part of the law that makes sense. "Fewer people are going to be able to get out of debt under this new bankruptcy law," she says.

The most at risk, she says, will be middle-class families who find themselves in unexpected financial straits, such as losing a job, becoming seriously ill, or going through a divorce. "It will not affect the super-rich who hire lawyers to help them prepare for filing anyway."

Also disproportionately affected by the bill are the poor and minorities, say some, because the cost of filing for bankruptcy is going up significantly.

"Contrary to what the credit institutions think, most people are not crooks," says Mr. Black. "Most people want to repay as much of their debt as they can."

And that may be truer in the South than elsewhere, according to studies showing that these states tend to have higher rates of Chapter 13 filings, which require people to pay back a significantly higher portion of their debt than if they'd filed for Chapter 7 bankruptcy.

New England states, on the other hand, have substantially higher Chapter 7 filings. "It's true that there is more social pressure in the South to pay off your debt," says Professor Westbrook.

Whatever the regional differences, expect to see a lot more bankruptcy filings across the country before the bill takes full effect in October, says Jeffrey Morris, a scholar in residence at the American Bankruptcy Institute in Alexandria, Va.

He predicts a drop-off in filings after October, which is what proponents of the bill are hoping for. But he doesn't expect that short-term decline to last.

"The thing that makes people file for bankruptcy is not the statute. It's lack of money, and that happens whether the bankruptcy code says X or Y," he says. "If you can't buy food, you don't worry about the niceties of the statute."

But some experts believe this new bill is going to create an even larger number of "informal bankruptcies" - people who simply move and leave no forwarding address, change their telephone numbers or hang up on creditors, and restructure their financial affairs to hide their assets.

"This new bill is erecting obstacles to formal bankruptcies so the likely response is that there will be more informal bankruptcies," says Lawrence Ausubel, an economics professor at the University of Maryland in College Park who has studied the practice of informal bankruptcies.

"So if you look at bankruptcy statistics a couple years from now, [proponents of the bill] are going to be ready to declare victory, but they will be overlooking a whole subclass of people who are laying low and living a little bit on the fringe," he says. "No matter how you look at it, that's bad for society."

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