With some exceptions, the new bankruptcy provisions do not become effective, and therefore applicable, until 180 days after enactment, or October 17, 2005. Since the new provisions are generally favorable to creditors at the expense of individual debtors, the general notion is that there may be a rush by potential individual debtors to file Chapter 7 petitions before October 17, 2005, so that they are not impacted by the new provisions. This could have a significant impact on lenders that make consumer loans or extend consumer credit — e.g., home lenders, credit card lenders, household item financers — because they may be inundated with Chapter 7 filings by their borrowers prior to October 17, 2005.
There are some new bankruptcy provisions that take effect immediately (thereby providing no incentive to individuals to “rush to file”), and others that are favorable to consumers at the expense of lenders (e.g., expanding the exemption for retirement funds and discouraging abuse of reaffirmation agreements). The new provisions that favor lenders and do not take effect until October 17, 2005, however, appear to outweigh the provisions that favor consumers or take effect immediately. Therefore, lenders that make consumer loans or extend consumer credit are likely to see a spike in Chapter 7 consumer filings through October 17, 2005.
The chart below illustrates some examples of why consumer debtors may rush to file. The examples are divided into substantive and procedural incentives to “rush to file.” Curiously, except for means testing, it appears that the procedural changes provide more of an incentive than do the substantive changes to “rush to file.”
Factors That May Lead to “Rush” Filings Before October 17, 2005
- Means Testing for filing Chapter 7, resulting in fewer individuals being eligible for Chapter 7 (11 USC Section 707).
Factors That Make Bankruptcy Less Attractive But Do Not Create an Incentive for “Rush” Filings
- Expansion of nondischargeable debts (11 USC Section 523(a)(19)(B)) is effective immediately (so there is no incentive to rush to file).
- Limitations/Reduction of Homestead Exemption (11 USC Section 522) is effective immediately (so there is no incentive to rush to file).
- Attorney for Chapter 7 individual can be liable for Trustee’s expenses in obtaining conversion to Chapter 13 or dismissal and other sanctions if attorney signs a petition falsely indicating, eligibility for Chapter 7 (11 USC Section 707).
- Individual cannot file Chapter 7 before obtaining a briefing from an approved non-profit budget and credit counseling service within 6 months before filing (11 USC Sections 109, 111).
- An individual cannot obtain a discharge under Chapter 7 before completing a course on personal financial management (11 USC Sections 111, 727).
- Bankruptcy petition preparers face stiffer penalties for abusive practices (11 USC Section 110).
Written by Theodore A. Cohen