Number of bankruptcy filings increase as limits loom.

Debtors are crowding into local bankruptcy courts to file for Chapter 7 liquidations before a new, more restrictive federal law takes effect.

There were 3,644 Chapter 7 filings in Los Angeles and the San Fernando Valley in May, up 32 percent from May 2004. The jump in the mostly individual filings comes despite low interest rates and generally favorable economic conditions.

Meanwhile, Chapter 11 bankruptcy filings, used mostly by businesses seeking to continue operations while getting out from under debts, have fallen substantially. From January through May, there were 50 Chapter 11 filings in L.A. County, down from 68 filings during the same period in 2004.

Richard Moneymaker, an L.A. bankruptcy attorney, said he's also been getting "an awful lot of phone calls. People are definitely very nervous out there."

The increase in personal bankruptcies began in March, when it became clear that Congress was going to pass a controversial reform measure. Since then, filings rocketed by about one-third as debt-laden consumers grow skittish about their ability to wipe the slate clean under the new law taking effect in October.

While the law makes some changes to business filings, it was aimed more at reducing consumer filings. Backed by credit-card companies, it requires fliers with incomes above the state median to reach a repayment agreement with a bankruptcy court judge under Chapter 13 of the U.S. Bankruptcy code. (Under Chapter 7, debts are simply wiped clean.)

"There's a sense of panic out there, of people rushing in to file before the deadline, even among those who probably would not be impacted by the new law," said Ken Schwartz, a bankruptcy attorney in Woodland Hills.

Increased filings

The legislation was aimed at cracking down on fraudulent or abusive filings. Creditors complained that some unscrupulous debtors use bankruptcy to avoid paying their bills despite a healthy income. And nationwide, personal bankruptcy filings have been going up: around 1.6 million in 2004, up from about 900,000 in 1995. While bankruptcies nearly doubled, credit card industry profits more than tripled in the same period.

A survey this month by Best Case Solutions Inc., which provides bankruptcy preparation software, indicates that at least 85 percent of debtors who file for bankruptcy under Chapter 7 would still be eligible to file when the new law takes effect. The survey was based on analyzing over 11,000 actual bankruptcies between June 15 and July 6.

But consumer groups have opposed the law, saying that it raises the hoops too high for consumers hit by sudden family tragedies, medical expenses or loss of income. Some opponents project that the new law will net the credit card industry an additional $5 billion.

Before passage of the law became likely, consumer bankruptcies in the Central District of California had fallen to their lowest levels since 1990, falling 45 percent in just four years.

Record low interest rates enabled many consumers in a financial bind to refinance their mortgages to free up cash.

In March, passage of the bankruptcy overhaul began to look more likely. Chapter 7 filings in L.A. County shot up nearly 50 percent and have remained high.

National numbers only go through the first quarter, so they don't reflect the upturn in filings. However, local bankruptcy lawyers said they expect second-quarter numbers to show a nationwide trend similar to L.A.'s.

Chapter 7 filings are expected to peak in the third quarter, just prior to the Oct. 17 start date for the bankruptcy legislation.

Bankruptcy attorney and law professor Ken Klee said he has been talking to one small-business man feeling squeezed by the new law.

"His business is slow and he's using credit cards to sustain his business while he looks for a buyer. He's conflicted about whether to file for bankruptcy relief while he still can," said Klee, a UCLA law professor and partner in Century City-based Klee Tuchin Bogdanoff & Stern LLP.

"Once the law takes effect, his debts may become non-dischargeable. He's also worried about not having a source of reliable income after Oct. 17 to make his debt payments. He thinks he would be caught without any meaningful relief after the law takes effect, so he's thinking about filing before it takes effect."

Beating the Deadline

Chapter 7 bankruptcy filings in Los Angeles County.

January     2,213
February    2,412
March       3,603
April       3,590
May         3,644

Note: Table made from bar graph.

Source: U. S. Bankruptcy Court, Central District of California