BANKRUPTCY RUSH.

Byline: Joe Mosley The Register-Guard

Here's some lawyerly advice for the deeply indebted: Look first, by all means, but don't dawdle too long before leaping into bankruptcy.

Big changes in U.S. bankruptcy laws will make it more difficult and expensive for individuals to seek forgiveness of their debts after Oct. 16, and there's a growing crowd of Eugene area consumers queueing up to take the plunge before then.

Financial institutions saw a spike in the number of their clients filing for bankruptcies within a month after Congress approved a long-anticipated overhaul of the bankruptcy code in April, and local lawyers who specialize in bankruptcies say their summertime appointment books are filling up fast.

"I don't think we're going to have lines around the block or anything, like at `Star Wars,' ' Eugene bankruptcy lawyer Gavin Armstrong says. "But we'll have full offices.

"There are so many reasons that if someone was going to file anyway, it's better to do it now," he says. "It always should be looked at as a last resort, but at this point, not as a last resort you keep putting off."

Congress passed the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 at the urging of the Bush administration, following an eight-year lobbying campaign by banks, credit card companies and other financial institutions.

In a nutshell, the 500-page legislative act imposes a means test intended to reduce the number of personal debtors allowed to file for bankruptcy under Chapter 7 of the code, which provides for the outright forgiveness of most debts in return for the surrender of most assets.

Those whose incomes are above the median for their state will be required instead to file under Chapter 13, which requires that a debtor's disposable income be earmarked for at least partial repayment of debts over a three- to five-year period.

The new law also will require a course of consumer and credit counseling for anyone seeking to file for bankruptcy.

"I think in the long run, it's going to help those folks who really need to file bankruptcy," says Kent White, vice president for marketing at Springfield-based Northwest Community Credit Union. "But it's going to be more discouraging for those who may just use bankruptcy as a financial planning tool."

Last year, more than 1.1 million personal debtors filed for bankruptcy under Chapter 7 and about 450,000 filed under Chapter 13. The new law is expected to suppress filings overall and to shift as many as 200,000 filings to Chapter 13 from Chapter 7.

It also is expected to increase debtors' court-enforced payments to their creditors by as much as $1 billion per year.

"Bankruptcy is costing your family, my family, everybody's family, about $550 a year," says Bill Woods, lending vice president at Northwest Community Credit Union, citing a recent study by the Credit Union National Association.

"When we do the pricing of our loans, we have to include that," Woods says. "We have to figure out what our losses are going to be, and when our losses go higher, we have to increase our pricing.

"(Bankruptcy) is being used and abused, and I think the consideration (of Congress) is in trying to get rid of the abuse."

Bankruptcies filed by members of the credit union jumped from 21 in March to 43 in April, as Congress deliberated and then passed the bankruptcy reform act. The number declined to 31 in May, but expectations nationwide are for a crush of new bankruptcy filings through the summer and then a steep - if temporary - drop-off after the new laws go into effect on Oct. 17.

"That is a national trend," says Sam Gerdano, executive director of the Virginia-based American Bankruptcy Institute, which provides information and analysis on bankruptcy issues to a membership of more than 10,000 lawyers, judges, bankers, lenders and others.

"Filings are up all over, and we expect that will continue right through October," Gerdano says.

Nationwide, the total number of bankruptcy filings for the three months ending March 31 was 401,149, up from 371,668 for the three months ending last Dec. 31. The March quarter's total was down slightly from the 407,572 bankruptcies filed during the same period in 2004.

In Oregon, total filings through the first five months of 2005 are up 8 percent over the same period last year, to 10,818. March filings were up 6.2 percent, to 2,508, over the same month in 2004, and April filings were up 6.3 percent, to 2,603. In May, filings jumped 16 percent - to 2,488 - compared with a year ago.

"It's not terribly dramatic," says Kathleen Normile, who tracks statistics in Portland's office of the U.S. Bankruptcy Court.

But filing figures and statistics - even Oregon's 16 percent increase in May filings - may not tell the whole story because of what Gerdano of the American Bankruptcy Institute calls the "cross-currents" of positive economic factors vs. the timing of Congress' action on the bankruptcy code.

There has been an uptick in filings every time Congress has taken up the reform issue in recent years, he says. But more than two years of low mortgage interest rates - which have enabled homeowners to take cash out of their homes to pay down their consumer debt - has had the effect of muffling the boom in bankruptcy filings that was expected during and after the congressional action.

"The effect of the new law is entirely predictable," Gerdano says. "And this is the real deal, not a threat. It is actually happening."

That's not news to Buz Mattson, whose two-year-old bankruptcy law practice in Eugene and Lebanon has seen a huge increase in clients since the reform measure went before Congress. "My business has about doubled over what it was last year," Mattson says. "I think I just filed my 105th (bankruptcy) of the year, and I reached that number on Oct. 25 last year."

Mattson says the rush to file probably isn't doing any permanent damage - most of those who are filing with his office probably would have wound up there eventually. But the October deadline has prompted some to take the last-resort step without fully considering options or making a final effort at addressing their debts, he says.

"What I think the new law is doing is sending people into bankruptcy when maybe they don't have to go yet," Mattson says. "They're rushing to beat the new law. Bankruptcy's in their future, but they're rushing."

Mattson says that while the congressional reforms may suppress some Chapter 7 personal bankruptcies - he estimates that fewer than 10 percent of his clients would fail the median-income means test - several factors will continue to put consumers at risk of economic failure.

Super-low interest rates on adjustable-rate mortgages issued over the past couple of years will catch up with some people when the interest rates are adjusted upward, he says. And lending fads such as mortgages for as much as 125 percent of a home's equity are invitations to disaster.

"I still think the ease of getting credit puts naive people in financial difficulty," Mattson says.

But the biggest reason why the new law won't put bankruptcy lawyers out of business is that medical bills are a fact of life. Mattson says that most of his clients have gotten in over their heads because of unmanageable medical bills rather than mortgage defaults or credit card debt, and other lawyers agree.

"If we had some kind of universal health care, bankruptcies would fall by half or more," says Armstrong, the Eugene lawyer.

But Armstrong also blames what he says are overly liberal loan policies that put borrowed money into the hands of people who are incapable of handling the responsibility.

"If some of the unsecured credit lenders would use better credit judgment, I think we would have less people filing," he says.

At Northwest Community Credit Union, those on the other side of the equation are preaching personal responsibility and - when it comes to bankruptcy filings - restraint.

`We're the `now' generation,' says Woods, the credit union's vice president of lending. "We not only want it now, but when we get overwhelmed, we want to get out from under it now."

He and White, the institution's vice president of marketing, rattle off a list of reasons people may want to think twice - maybe more - before jumping into a bankruptcy.

Bankruptcies are public records, and will show up whenever prospective employers, landlords, lenders or even insurance companies do background checks on applicants. Bankruptcies are not cheap, with filing fees, lawyers' fees and soon a fee to enroll in the credit counseling sessions that become mandatory in October.

And even future loans will cost more for someone who has filed for bankruptcy, with most lenders requiring higher rates, shorter terms and larger down payments.

"Creditors are happy to work with you to reduce or consolidate (debt) payments," White says. "Most are much more than willing to help, so there are alternatives to bankruptcies.

"The moral of this story, for anyone considering filing for bankruptcy, is to look very, very hard before you leap. It's a long way up again."

CAPTION(S):

Gavin Armstrong, a bankruptcy lawyer, expects that new laws that go into effect in October will hasten some people's decision to file.