Bankruptcy law still controversial 1 year later
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Supporters say the critics have it wrong.

"The consumer provisions are workable," says Clifford White, acting director in the Executive Office for U.S. Trustees.

Calling the test the "cornerstone of reform," White says it provides adequate discretion so that decisions on filing motions to dismiss can be made on a case-by-case basis, not only using the statutory formula.

He says 95 percent of the debtors filing under the new law were below the median income. Of the remaining 5 percent, those to whom the means test applies, slightly less than 10 percent were "presumed abusive." And of the presumed-abuse cases that did not voluntarily dismiss or convert, United States Trustees filed motions to dismiss in about three-quarters of the cases and declined to file in about one-quarter of the cases. Tinkering with the law and its enforcement may not be over.

Trustees to oversee
The U.S. Trustee Program has been asked to oversee the financial education requirement of the new law by approving and monitoring the credit counseling requirements.

The counseling provision was touted as a vital element of the law, but so far, it has mostly amounted to a few hours of Internet-based counseling that is a money-loser for its biggest provider -- the National Foundation for Credit Counseling.

The NFCC's affiliates, which operate under the Consumer Credit Counseling Services banner, provide a majority of the approved 153 counseling agencies and 275 debtor education providers.

Based on current estimates of 600,000 bankruptcy filings in 2006, and assuming the same delivery mix, an annual funding shortfall of $7.52 million appears likely for pre-filing counseling service delivered by NFCC agencies, the foundation reports.

Fees waived
"With just one year's experience, it is still too early to assess the law's long-term impact," Susan C. Keating, president and CEO of the NFCC, says in a written release. "We are pleased to see that our financial education efforts are showing positive results, but we also recognize that it will take time to measure the effectiveness of the financial counseling and education requirements of the law."

Counseling agencies are required to provide their services regardless of the debtor's ability to pay. So far, NFCC agencies have waived 16 percent of pre-filing session fees and 13 percent of pre-discharge education classes.

Fee waivers are among the various issues the Trustee Program may address in final rule making in the coming months, says Jane Limprecht, spokeswoman for the Executive Office of the U.S. Trustees.

The need for the fee waivers -- and bankruptcy itself -- is still strong.

"Consumers filing for bankruptcy are upside down financially," Keating said at the ABI meeting. Keating noted that in the survey the organization found the average unsecured debt was $11, 599 greater than the average income.

The bankruptcy attorneys survey also found that, in the attorneys' view, means-test filings were rare and very few filings were about wasteful spending. They say the majority of cases involve consumers forced into bankruptcy due to unforeseen expenses.

Normal levels will return
Both credit counselors and bankruptcy attorneys are expecting filings to return to normal levels by the end of the year.

Expect more reviews of the controversial law. Quality service checks are another component of the updated law that is now under way. Trustees have begun their post-approval and on-site reviews of credit counseling agencies.

Consumers' cases will also be under review. The updated law calls for one out of every 250 consumer bankruptcy cases to be audited by an independent certified public accountant 18 months after the law's enactment to verify the accuracy of the paperwork filed.

"This regimen of audits will help to identify cases of fraud and abuse, enhance deterrence, and provide baseline data to gauge the magnitude of fraud, abuse and errors in the bankruptcy system," says White.