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"Death by 1,000 Cuts" for Low-Income Debtors Seeking Fresh Start, as

Friday, October 07, 2005

  • The Brennan Center
  • Source: Montana > Montana Advocate Resources
Low-income debtors considering filing for bankruptcy should do so now, before new, stringent rules take effect on October 17, 2005, Legal Assistance Foundation of Metropolitan Chicago attorney David Yen warns. Once the new rules take effect, debtors will face new challenges to filing Chapter 7 or 13 bankruptcies, and legal services representation may not be as effective at giving a fresh start to people hopelessly in debt. As the law intends, moderate and high income earners will be forced into Chapter 13 instead of Chapter 7 bankruptcy -- this will require people who earn above their state's median income to pay their debt down. But the new rules also raise significant barriers for low-income debtors filing bankruptcy claims, including Katrina victims who have lost their jobs and paper records.

Among the new rules, low-income debtors must complete credit counseling with an approved counselor within six months of filing for bankruptcy, provide a series of documents proving their income and assets, and pay an increased filing fee to start proceedings. They also will be subject to a means test, which will determine their filing eligibility. For victims of Katrina who lost jobs, not to mention necessary paperwork, the new rules could make filing for bankruptcy very difficult.

Additionally, a new requirement forces lawyers to investigate claims made by clients about their available financial resources. Lawyers who do not adequately investigate client claims may be subject to fines. This new provision will make the process of filing for bankruptcy more expensive, and, in some circumstances, may turn lawyer and clients into adversaries. Under the new law, legal services attorneys will have to expend more time and resources to help low-income clients navigate the bankruptcy filing process and may end up serving fewer clients. Pro se representation for people who do not meet LSC's income eligibility guidelines also will be more difficult than before because of the new requirements. Yen explains the net effect of the new rules, saying, "If there were only a few changes to the bankruptcy rules, the situation would be livable. But the cumulative effect is that it's a lot more expensive and time-consuming to file bankruptcy claims. For low-income debtors, it's death by 1,000 cuts."

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