Bankruptcy changes could cause attorneys headaches.

It's no secret that large numbers of debtors flocked to the bankruptcy courts in recent months to bail out of debts before newly enacted bankruptcy legislation took effect last month.

But a whole other group may be bailing out of the bankruptcy business as well.

Along with imposing what many consider onerous requirements on consumers who find they can't (or don't want to) handle their debt load, the legislation also places requirements on bankruptcy attorneys that, these lawyers say, may make it too risky, too expensive or too complex to continue to handle these cases.

Specifically, the new legislation, Section 707 (b), makes attorneys representing debtors accountable, and liable, for information their clients provide to the court in filing their petition. If it isn't, attorneys can be assessed penalties.

The regulation means that attorneys will have to spend more time investigating their client's financial condition to determine whether the information they've provided is accurate.

While there are numerous avenues attorneys can use to check on the veracity of their client's filings, they all require additional time and additional cost, cutting into the already thin profit margins of the firms that specialize in representing average consumers in these cases.

"I think it's going to price attorney services beyond the reach of many people at a time when the laws are more complicated," said Steven R. Fox, an Encino bankruptcy attorney.

Among the changes in the bankruptcy codes, most consumers will no longer be able to file Chap. 7 and will be required to file Chap. 13, which means their debts will be reorganized so that some payments can be made to creditors. At the same time, they will be required to undergo pre-bankruptcy counseling and post-petition financial management classes.

The new regs also take away a lot of discretion from bankruptcy judges, who, in the past, were able to assess the sincerity of the debtor and reach a resolution accordingly.

"I'll tell you right now the judges I've seen on panels are not happy," said Jennifer Witherell Crastz, an associate with Hemar, Rousso & Heald who represents creditors. "The bankruptcy court is a court of equity, and it is supposed to allow a judge discretion to determine what is best for the debtor, and their ability to do that is being taken away."

The new legislation came about as a result of a gradual loosening of bankruptcy codes that eventually led to a debtor-friendly court system where, debtor and creditor attorneys agree, bankruptcy became one more financial alternative instead of the means of last resort it was intended to be.

Working the system

But the new regulations, many say, may be limiting options for the very people the bankruptcy laws are intended to serve, while allowing others, with greater financial resources, to work the system. In part, that's because only the more experienced--and more expensive--attorneys will take on these cases.

"I think what it's going to do is shift the economics of the practice in that you really can't have junior people looking at this, otherwise, you'll start losing money," said Wesley H. Avery, partner with Ezra, Brutzkus & Gubner and a certified specialist in bankruptcy law. "I think what it's going to do is bring more business to those who are specialists in debt and reorganization and those who are marginally in the business will get out."

Paralegal services such as We the People have built up large practices offering inexpensive services to those who want to file bankruptcy, and the new regulations, in large part, were intended to make it more difficult for these companies to offer bankruptcy services.

But along with discouraging paralegals who hang out a shingle, many say the new regs will also discourage the lawyers who charged more reasonable fees from representing debtors.

Along with the shift to more experienced practitioners, junior associates who were often encouraged to handle pro bono bankruptcy cases to gain experience, are likely to move into other areas, reducing the counsel available to the most needy.

Pro bono cases

"Many bankruptcy firms encourage their attorneys, especially their younger lawyers, to volunteer their time to handle a pro bono bankruptcy case," wrote Andrew A. Goodman, a partner with Greenberg & Bass in a paper raising some of the issues the new law poses. "With the increased burden placed on the lawyer to investigate and verify the accuracy of the information set forth in the petition and schedules, many firms may rethink their policy, concerned about possible sanctions and increased malpractice premiums based on the stricter requirements being placed on consumer bankruptcy lawyers."

The majority of those who run up unmanageable debt do so because of an unforeseen emergency, often a health emergency that drains their savings and robs them of earning power.

These folks are those most likely to be affected by the new legislation.

Without reasonably-priced representation, attorneys say, this segment of the population will likely have to fend for themselves, at a time when the regulations have become far more complex, even for professionals to handle.

And if a debtor fails to follow proper procedures and the bankruptcy petition is dismissed, he or she will face even more onerous requirements when refilling.

"The automatic stay (that keeps creditors from taking assets) goes away after 30 days," said Fox. "Instead of presumption that you're acting in good faith, you have to prove you're acting in good faith. Those are significant problems. There are ways to deal with them, but you're talking about needing an attorney and more cost."

Meanwhile, the debtors that the law was intended to rein in are likely to find other ways to avoid their debts, attorneys say.

"I think what it's going to do is create a whole new cottage industry for hiding assets," said Crastz. "What's happening is virtually no one qualifies for Chap. 7. If they want any kind of relief, they have to file Chap. 13, and getting a plan confirmed is harder. So I suspect debtors will do some creative asset planning."