Bankruptcy attorneys preparing for squeeze under reform rules.

Los Angeles attorneys who handle personal bankruptcy cases could find themselves squeezed by legislation to overhaul the nation's bankruptcy laws. The reform bill just passed the Senate and is expected to reach President Bush's desk later this year.

The legislation would make it more difficult for individuals to file for Chapter 7 liquidation--as well as more expensive.

"Attorneys will be required to do much more in every single case," said Stuart Price of Encino-based Price Law Group. "Attorneys now have to personally verify and investigate the debtor's financial situation and assets."

The legislation, called the Bankruptcy Abuse Prevention and Consumer Protection Act of 2004, is aimed at overhauling a system that critics say is rife with abuse and fraud. Consumer groups have argued that the changes will limit the opportunity to erase past debts and get a fresh start.

Total bankruptcies in the Central District of California, which includes the Los Angeles region, are at their lowest level since 1990, according to the American Bankruptcy Institute. In the last four years, consumer bankruptcies, which make up more than 97 percent of all bankruptcies, have fallen by 45 percent.

Under the bill, a bankruptcy attorney must certify information that includes monthly net income projections, federal tax returns and pay stubs from employers. Also under the measure, an individual must receive credit counseling prior to filing for bankruptcy protection, and anyone whose income is above the state median must enter into repayment under Chapter 13, as opposed to Chapter 7, which cancels all debt.

"Sometimes people haven't filed tax returns or don't keep copies of their bills," said Andrew Goodman, a partner at Greenberg & Bass in Encino. "They don't have everything on Quicken. That's often why they're in your office."

Under the bill, an attorney who provides inaccurate information must reimburse bankruptcy trustees, creditors or interested parties who are forced to pay for unnecessary court filings. As a result, many attorneys expect to hire investigators, and those costs would be passed down to the individuals filing for protection.

In Los Angeles, bankruptcy attorneys typically charge an upfront fee of $600 to $2,500 for Chapter 7 filings (liquidation) and $2,000 to $2,500 for Chapter 13 filings (reorganization).

To make up for lost business, many personal bankruptcy attorneys, as well as professional financial planners, expect to offer preventative counseling services. In Los Angeles, this could become a significant business given the large number of people who are self-employed and own small businesses.

"More of them will be marshaled into a Chapter 13 bankruptcy, in which case they won't be able to walk away clean but will need to meet obligations the court will mandate," said Joel Framson, a CPA and personal financial specialist at Allied Consulting Group in West Los Angeles.

Price said he plans to offer more clients debt negotiation services, which pay 15 percent to 25 percent of what a client saves.

Less impacted would be business bankruptcy attorneys, since the bill makes minimal adjustments to Chapter 11 filings, which reorganize a business.

The bill would reduce the number of extensions a bankruptcy judge would grant a company facing a potential foreclosure on its mortgage or possible eviction. "It'll change how businesses in Chapter 11 are handled and how they proceed through the courts," said Goodman, "but that won't necessarily impact the number of filings."

The bill is expected to pass the House in the next few months.