DEBT IN STONE? CONSUMERS, LAWYERS UNSURE HOW BANKRUPTCY CHANGES WILL PLAY OUT IN FALL.

Byline: Evan Pondel Staff Writer

Rosalia Garcia never thought she would end up in bankruptcy court for money she never spent.

But when Garcia's son decided to buy a new $20,000 car, the dealer required a co-signer, so the mother of four attached her name to what eventually became an insurmountable load of debt.

``This was a big mistake that I had to dig myself out of. My son had a job, and I thought he would be able to pay off the car,'' the 40-year-old Antelope Valley woman recalled.

Garcia thought wrong.

The monthly car payments piled up, and filing for Chapter 7 bankruptcy protection - a provision that provides a clean break from credit obligations - became Garcia's only other option short of selling her home.

Come October, when a new bankruptcy law takes effect making it more difficult to wipe away debt with a simple Chapter 7 filing, Garcia would have likely had to sell her $235,000 home.

Consumers, bankruptcy attorneys, trustees and judges are just starting to grasp what the new law means for an industry that many say was long due for reform.

A year ago, approximately 1.59 million people filed for personal bankruptcy, 700,000 more filings than a decade ago. Consumer debt also continues to rise, currently hovering at $2.12 trillion, 100 percent greater than a decade ago, according to the Federal Reserve.

The new legislation, quite possibly the most significant change to bankruptcy law in more than two decades, is backed by credit card companies and banks that argue the current laws skew too much in favor of the debtor.

The law attempts to address this by making it more difficult for consumers to walk away from credit card bills or other loans that aren't secured. The law requires debtors to receive credit counseling prior to filing for bankruptcy. And it also requires the bankruptcy court to conduct some sort of means test that will determine whether the consumer has the means to repay their debts.

With debt and even housing prices well over what many consumers can afford without a massive loan, the new bankruptcy bill is creating a sense of urgency among Southern Californians who can no longer shoulder their indebtedness.

U.S. Bankruptcy Court Judge Geraldine Mund from the Central District in California said she expects to see an increase in bankruptcy filings before the law goes into effect later this year. But what concerns Mund most about the new law is that means testing could negatively affect debtors who shouldn't be categorized by a means test.

For example, the law will require attorneys and the like to compare debtors' salaries with a federal or state median salary prior to filing for bankruptcy protection. If the debtor's salary is equal to or greater than the median salary, the debtor will not be eligible for protection they may have been entitled to before the new law.

``The problem for California is that the standard (the federal government is using) doesn't factor whether it costs more to buy things in California versus Michigan,'' said Mund, noting that there might be a vast discrepancy between someone making a median income salary in Michigan compared with in California.

The other issue, Mund said, is that means testing also doesn't factor in medical problems that may lead to severe debt. ``So the person who encounters financial difficulty and uses a credit card for cancer is treated the same way as a person who went to Vegas,'' she said.

Despite concerns, some view the new bankruptcy law as consistent with other U.S. policies that attempt to make the consumer more responsible for their actions. Social Security, 401(k) plans, health care and other forms of insurance are forcing consumers to take on more ownership.

``Consumers won't be able to just walk away from their debt any more,'' said Pete Moraga, spokesman for the Insurance Information Network. ``And that means it's a good time for people to re-evaluate their insurance policies. Many people are driving with very little liability when factoring the jury awards right now.''

But sufficient liability coverage doesn't always ensure financial solvency. Several years ago, Susan Corona, 39, found herself entrenched in a divorce and couldn't afford to pay off her credit cards.

With a brand new baby and three credit cards totaling $20,000, Corona sought relief by filing for Chapter 7 bankruptcy protection three years ago.

``I am grateful for that,'' said Corona, who has recently moved to Bakersfield from Santa Clarita. ``And I'm glad I got through this before the law went through.''

Though Corona agrees that reform is needed to prevent a greater glut in bankruptcy filings, she said the new legislation is ``too strict and won't make it easy for those people like myself who have gone through a particularly nasty divorce.''

For that reason, ``I think this law creates additional burdens on the debtor,'' said Bryant MacDonald, a consumer bankruptcy attorney in Redlands. ``The law is going to make it significantly more expensive for people to file, and quite frankly I think the bill was created to push people into debt-counseling services sponsored by the credit card companies.''

The Community Financial Resource Center, a Los Angeles-based credit counseling organization that is sponsored by several credit card companies, would not comment on the new bankruptcy bill after several calls.

As for the expense of bankruptcy, MacDonald said just filing can cost a consumer more than $1,000. ``And what bothers me even more about this bill is that the federal government didn't get any concessions from the credit card companies.''

The American Bankers Association, a Washington, D.C.-based trade group that represents banks and credit card companies, doesn't believe such an argument is justified.

The ABA claims that under the current bankruptcy system higher-income filers aren't held accountable for their debts. And the new reform would accomplish this by taking a closer look at income and expenses.

``With the old system there really wasn't a way to determine what was appropriate when filing for bankruptcy protection,'' said Laura Fisher, a spokeswoman for the trade group. ``And the hope of this bill is that more people will be able to pay back some of their debt.''

But Stuart Price, an Encino-based attorney, disagrees. Instead, he said the laws are going to make the process ``a more painful experience for everyone involved, including the debtor.'' Price noted that the credit card industry is not helping the situation.

After his client Fred Ross ran up several hundred thousand dollars in credit card debt, the San Fernando Valley resident successfully filed for Chapter 7 bankruptcy protection. But ``then the credit card applications started showing up in my mailbox again,'' Ross said. ``I thought to myself, 'Hey, wait, didn't I just file for bankruptcy because of these companies?'''

The banking industry rejects the notion that the mismanagement of credit ultimately leads people to file for bankruptcy protection. ``There are other factors influencing this, including divorce and unemployment,'' Fisher said.

Regardless of what drives consumers to file for bankruptcy protection, the question is, how does one avoid getting hurt by the new law? David Hagen, a bankruptcy attorney and U.S. trustee, recommends tackling the issue with a professional, not a how-to manual.

``You could end up finding yourself in a lot dire of a situation,'' said Hagen, who acknowledges that as a trustee it's easy to empathize with a debtor's financial woes.

But it is still too early to determine how the new bankruptcy law will affect consumers. ``What usually happens is a law like this will make a big splash and then everyone figures out how to work with it,'' said Jeffrey Morris, the Robert M. Zinman scholar in residence at the American Bankruptcy Institute. ``I think the law's hard edges will get knocked off, and then the bill itself will be a matter of interpretation. And if the courts can't make it work, then it's no good for anyone.''

Evan Pondel, [phone]

evan.pondel(at)dailynews.com

CAPTION(S):

drawing, box

Drawing:

(color) DEBT in STONE?

Jon Gerung/Staff Artist

Box:

BANKRUPTCY'S NEW BILLING

Source: Daily News research