Editorial Article printed October 20, 2005 in the Gazette

At midnight on October 17 a new stricter bankruptcy law went into effect In the weeks preceding the October 17th deadline, thousands of Iowans filed for bankruptcy protection partly because they believed that they would not be eligible for bankruptcy under the new law. As a local bankruptcy attorney, I helped hundreds of Iowans file bankruptcy over the past few months. I talked to many more who wanted the protection of bankruptcy, but just could not find a way to file in time.

Iowans burdened with debt are telling me they are worried about the new bankruptcy law, about how it will affect their ability to file bankruptcy. What about those who didn’t make the cut? Is the new law going to keep honest Iowa debtors from seeking and receiving the relief our laws have previously afforded those who have met misfortune? Will we make those who are burdened with debt, whether due to medical catastrophes, unemployment, or spiraling credit card interest, carry their debts with them to their graves?

The answer is clear. The fact is that most Americans in financial trouble will still be able to take advantage a fresh start through bankruptcy. There are a lot of rumors and myths circulating about the new law and I’d like to dispel some of those myths.

Myth: You won’t be able to file bankruptcy at all under the new law.
This is absolutely not true. The new law does impose several new requirements to file bankruptcy, but in no way does it bar you from filing altogether. The law still recognizes that bad things can happen to good people and if you have suffered a serious financial setback due to loss of a job, medical bills, high credit card interest, or a natural disaster like Katrina, you are still entitled to bankruptcy relief.

Myth: You won’t be able to file “Chapter 7” bankruptcy which wipes out debt completely, but will have to file “Chapter 13” bankruptcy which requires long repayment plans under the new law.
Not true. The vast majority of people who file bankruptcy will still qualify for Chapter 7 bankruptcy. The new law was designed to prevent the handful of wealthy debtors who can afford to pay back their debts from using the bankruptcy system to escape their responsibilities. The new law has a complicated test which compares your income with your expenses to determine if you qualify for Chapter 7 bankruptcy. Some research shows that 97% of people filing bankruptcy (including those with above-average incomes) should pass this test and still qualify for Chapter 7.

Myth: You will have to give up all of your assets if you file bankruptcy under the new law.
Again, not true. Under the new law, the vast majority of Iowans filing bankruptcy will not need to give up any of their assets. The new law still allows you to keep your house, your car, your furniture, your retirement account, and most other assets so that you can get a fresh start in life after filing. There is a new provision in the law designed to prevent a wealthy debtor from escaping debts by moving into a different state and a buying a million dollar mansion, but this new provision will generally not affect Iowans, since Iowa already has its own state laws preventing this type of abuse.

Myth: You won’t be able to find an attorney to file your bankruptcy.
Not true. It is true that the new law imposes many new strict rules and regulations on attorneys who practice bankruptcy law. Attorneys who violate these new rules are subject to substantial sanctions by the court. Consequently, many local attorneys report that they will not be practicing bankruptcy law after October 17. However, there are several competent and experienced bankruptcy attorneys here in Eastern Iowa who will continue to practice bankruptcy law despite the law’s new harsh rules governing attorneys.

Myth: The new paperwork and education requirements will make filing bankruptcy impossible.
Not true. It is true that the new law has several new requirements which will make it more cumbersome to file bankruptcy, but if you truly need to file bankruptcy, these new requirements are not going to stop you. Under the new law, you must submit copies of last year’s tax return and two months of pay stubs. If you don’t have these documents, the IRS and your employer can usually provide you with copies. Under the new law, you will also be required to attend two court-approved classes on credit and debt management. Many debtors have little spare time to attend these debt classes, but these classes are also available by phone or Internet which should make it a little easier for you to fit them into a busy schedule.

Under the new law, there are new requirements which make filing bankruptcy more cumbersome, but for those Iowans who truly need the relief that bankruptcy provides, the new hurdles are not insurmountable. In fact, these changes may be nothing more than a few minor bumps compared to the personal and financial disasters that brought them to bankruptcy.

Janet K. Hong is a partner at the law firm of Lynch Dallas, P.C. in Cedar Rapids. She has been practicing bankruptcy law for 15 years and is a member of the National Association of Consumer Bankruptcy Attorneys.