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Jewish World Review March 21, 2001 / 26 Adar, 5761

Mary Deibel

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Consumer Reports

Here's what changes in bankruptcy law mean to you -- POSTAL workers Charles and Lisa Trapp "worked hard and played by the rules" even after their oldest child developed a rare muscle disorder that left her so weak she must use a wheelchair and respirator.

Annelise's illness left the Trapp family with $124,000 in medical bills and so deep in debt the couple filed for bankruptcy to get a fresh start for themselves and their three children.

As Congress and President Bush close in on the biggest overhaul of the federal bankruptcy rules since 1978, families like the Trapps who fall on tough times could find it tougher to erase their debts through Chapter 7 bankruptcy.

People deemed able to pay will have to file under a revised Chapter 13, which will require those making 80 percent of their state's median income to repay the debt while living under a court-supervised budget for up to five years.

Had the Trapps sought bankruptcy protection under the pending revision, they would have been put on a repayment plan that limits spending on food, housing, clothes, transportation and the like because the couple's combined income before Lisa Trapp quit her job to care for Annelise would count under the bill's needs test.

Bankruptcies dropped sharply from a 1998 peak of 1.4 million, to 1.2 million last year, and banks, credit card companies and other creditors pushing for change clearly hope a tougher law will continue the downward trend. They also anticipate that the added paperwork will discourage "bankruptcy mills" from ginning up business.

However, people facing a financial squeeze in today's slowing economy are being advised to act sooner rather than later because life could be harder when changes take effect six month after Bush signs the law.

Lawyers who advertise are flagging prospective clients on the pending change in newspaper ads.

New York attorney Dennis O'Sullivan has been running a local radio spot to counsel, "Now could be your last opportunity to receive relief under current law."

"Reports that filings are up so far in 2001 are anecdotal, but the ground tremors are there, and it's reasonable to expect some increase in filings before the law changes," says Sam Gerdano, head of the American Bankruptcy Institute. His group projects filings will rise 10 percent in 2001 due to the slowing economy.

In Cincinnati, where filings are up 17 percent the first two months of 2001 over a year ago, Mark Greenberger blames much of the uptick on the slowdown, rather than the change in the law.

"Between family tragedies, credit card debt and corporate downsizing ... personal bankruptcies were bound to hit home, whether the law changed or not," says Greenberger, a bankruptcy trustee since 1963.

Attorney Brady Williamson of Madison, Wis., who chaired a federal commission five years ago that recommended bankruptcy code changes, asks, "Is this the right time to be changing the rules for business and personal bankruptcy?

"Small businesses will have a tough time reorganizing under these revisions, and they'll liquidate instead, taking tens of thousands of jobs down with them," Williamson says. "Why change now?"

Bankruptcy lawyer William Brewer of Raleigh, N.C., says, "Lots of people are one layoff or serious illness away from bankruptcy and lots of people deplete their retirement savings, borrow from family and friends and turn over every rock for every last dime before they file. If anything, most wait too long."

This year, bankruptcies in Raleigh are up 37 percent over a year ago.

Where bankruptcy once was a blue-collar issue, today it's likely to be corporate executives caught up in mergers of companies that "don't need 100 senior vice presidents. These $60,000-a-year executives take $40,000-a-year jobs, and they suddenly can't make all the mortgage, car, tuition and credit card payments," Brewer says.

The typical family declaring bankruptcy has a $21,500 median income, well below the nation's median household income of $40,816, according to the bankruptcy courts.

Separately, a Harvard study found that, far from being deadbeats, families who file for bankruptcy are disproportionately headed by women and disproportionately elderly. Forty percent who file do so because of a health crisis similar to the troubles that hit the Trapps.

"If this bill had been law, we would have had to hire lawyers and defend every cent we spend in court," says Charles Trapp, who lives in Plantation, Fla. "We would have had to go to credit counseling to learn how to manage our money, but I don't think they could have taught us not to run up medical bills for a sick child."

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