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Chapter 7 in Georgia Becomes More Difficult on November 1, 2010

The United States Trustee has released revised median income figures for Georgia households.  These new figures will apply to Chapter 7 and Chapter 13 cases filed after November 1.   The revised figures continue the trend of lower household income amounts meaning that it will be more difficult to avoid a "presumption of abuse" in Chapter 7 filings.  Presumably the new numbers reflect lower household income figures associated with the current recession.

The Bankruptcy Code looks to median household income figures compiled by the U.S. Census to determine whether or not you have the "means" or capacity to pay back some or all of your bills.   Means testing was introduced into the consumer bankruptcy process in 2005.

The chart below summarizes the impact of the revised numbers:

The impact of this change is most pronounced on two person and three person families.   Lower median income numbers mean that more filers will end up in Chapter 13 since anyone "above median" will be presumed to have enough money to pay back creditors in a Chapter 13.  Chapter 13 cases filed using the new numbers will also result in higher monthly trustee payments because the amount of funds "available" to pay back creditors will be higher.

Above median debtors are not without hope – those filers can still qualify for Chapter 7 under part 2 of the means test, but that process puts more scrutiny on a filer's budget and adds to the complexity of the filing.  Read more about the forthcoming change to the median income tables on the Bankruptcy Law Network, where my colleague Jill Michaux has posted an article entitled "The Means Test Gets Meaner."

Bottom line:  if you are considering Chapter 7, look closely at that option prior to November 1, 2010 or risk an unpleasant post-Halloween surprise.

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Georgia Personal Bankruptcy Filings Continue to Increase

According to a recent article regarding Georgia bankruptcy published in the Atlanta Journal Constitution, it is nothing new that Georgia has one of the highest bankruptcy rates in the nation. What is new, suggests the AJC article, is who is filing: large numbers of people who have not previously had problems with financial instability.

With unemployment exceeding 10 percent, a real estate market in shambles, and many laws in place which support creditors, Georgia has had one of the highest bankruptcy rates for years. In 2009, and even here in early 2010, the numbers of people in Georgia filing personal bankruptcy continue to increase. These increasing numbers are partially the result of the large numbers of filers who are experiencing financial instability for the first time.

Richard Thomson, a partner at the Atlanta-based bankruptcy law firm Clark & Washington, said his firm is taking on an increasing number of higher-income professionals as clients. These higher-income filers simply can’t pay for all of their assets and possessions – boats, expensive cars, etc. As a result, they are filing bankruptcy as a means to start over, and their possessions are often given up as part of the process. According to Thomson, “They’re just saying ‘Take it. It’s not worth the effort anymore. I can’t keep up with it.”

Susan Blum and I are seeing the same trends here at Ginsberg Law Offices.   While our firm has regularly handled cases for formerly high earners and individuals with substantial assets, we are seeing more and more people who start our meetings by saying "I never in a million years thought I would ever end up talking to a bankruptcy lawyer…."   In many cases, clients who had previously enjoyed a comfortable lifestyle wait until disaster is about to strike before calling our office, perhaps in the expectation that their situations will improve.  And more and more of these clients are turning to a Chapter 7 liquidation rather than a Chapter 13 reorganization.

More Chapter 7 Cases Being Filed

According to the National Bankruptcy Research Center, over half of Georgians filing between January and November 2009 filed Chapter 7 Bankruptcy. In a Chapter 7, most debts are wiped out, but so are assets that aren’t protected by exemptions – second cars or vacation homes, for example. 47 percent filed Chapter 13 Bankruptcy, which allows consumers to hold on to a house and car but requires that they repay a portion of their debts generally over a five year period. A Chapter 13 is more or less a reorganization of debt.

These percentages are new for Georgia, which traditionally has been dominated by Chapter 13 filings, as debtors were most concerned about holding onto a house and accumulated equity. Currently, many homeowners have little equity or owe more than their houses are worth, which may be one reason for the spike in Chapter 7 filings.

According to Consumer Credit Counseling Service of Greater Atlanta, one in five consumers receiving recent pre-bankruptcy counseling said avoiding foreclosure was the primary reason for seeking bankruptcy protection. Georgia’s foreclosure process is the fastest in the nation, as it occurs without court or government supervision and takes only a week. A bankruptcy filing is the only realistic option for most Georgians seeking to delay a public auction of their homes.

I (Jonathan) have been representing individuals in Chapter 7 and Chapter 13 cases for over 20 years and I can only remember two or three times when the demand for our services was so high.  The Congressional Budget Office says that the recession is over but I am not seeing any indication that this is true.

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