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Bankruptcy filings by Los Angeles-area residents hoping to eliminate their mounting debts and start over again have soared in recent months, as much due to the prospect of tougher laws as the weak economy.

In the three months ending June 30, Chapter 7 bankruptcy filings in the Central District of California, which includes the San Fernando Valley, jumped nearly 25 percent compared with the same quarter a year ago. Chapter 7 allows people to erase their debts rather than restructuring their finances to pay off creditors.

``No doubt the influx is from the new legislation that is potentially coming,'' said Jon D. Ceretto, executive officer of the U.S. Bankruptcy Court for the Central District of California.

The legislation pending in Congress would toughen the standards to be eligible for bankruptcy under Chapter 7, used by about 70 percent of financially troubled consumers nationally to get rid of liabilities, except for child support and taxes, while keeping homes and cars.

Other consumers file under Chapter 13, which gives them up to five years to pay off their debts. Under the reform proposal, consumers would be forced to file under Chapter 13 if the court found they could pay 25 percent of their credit card debt or up to $250 a month for five years.

The surge in Chapter 7 filings in the district, which stretches from San Luis Obispo to Riverside counties, comes at a time when other second- quarter bankruptcy provisions in the region fell despite the weak economy.

Filings under Chapter 11, used mostly by businesses to reorganize their finances under a court-approved plan, decreased 3.7 percent.

Filings under Chapter 13 fell 10.1 percent.

A breakdown of nonbusiness filings in the district for all types of bankruptcies for the second quarter shows there were 23,965 personal filings, a 17.8 percent increase over a year ago and accounting for most of the surge in Chapter 7 cases.

Mark Markus, a Studio City attorney, said there's a perception that time is running out to clear individual debt through Chapter 7. But he noted the proposed legislation has yet to be resolved among congressional committee members.

``I think if the bill was in fact called off, not as many people would be filing,'' he said.

The bill is drawing attention because it has the potential to clamp down on the ease of filing for Chapter 7 bankruptcy.

Ceretto said with the new legislation, many more variables will be thrown into the mix of what constitutes a Chapter 7 filing.

``Currently, when you file for Chapter 7, there's no means testing no matter what your income is,'' he said. ``But with the new bill, your income will play a factor.''

The House and Senate have passed different versions of the bill, but it has been stalled for months as a House-Senate conference committee must reconcile the legislation before it moves to President Bush's desk.

The bill may continue to be hung up over details that involve filing for bankruptcy in Texas and Florida, said Geraldine Mund, chief bankruptcy judge for the Central District of California.

The issue of homestead exemption arises in both of these states because under current bankruptcy laws, debtors aren't as likely to lose their homes if they file for bankruptcy.

In other states, such as California, debtors are subject to laws that aren't as lenient, Mund said.

Not only does the bill have the potential to create a more stringent protocol in filing for bankruptcy, but it also complicates the process with more paperwork, which could take cases longer to resolve in federal court.

Mund said this poses a problem because it will put a major crimp in her court's work flow.

A new bill also takes time for the courts to fully digest, another element that could easily slow down a judge's ability to do the job, Mund said.

``In a court of equity you do the fair thing. When a judge's discretion is infringed upon, it makes it difficult to do that because with new laws, there's a lot of scribal errors,'' she said.

Despite the many pitfalls the legislation poses for consumers and the courts, creditors appear to benefit.

Lynn M. LoPucki, a law professor at UCLA, said it's really easy for creditors to place the blame on consumers for running up a truckload of debt. But in the end, the credit card companies will profit, especially if it's more difficult to file for bankruptcy under the new laws.

``Bankruptcy may be driven by consumer debt, but who are the people lending them the money?'' LoPucki said.

Still, the legislation, which many say was hatched by credit card companies, probably won't save creditors a significant amount of money in the long run as the bill may not even pass.

``The simple fact that this bill is taking so long to pass means someone in the system does want to face up to something,'' LoPucki said. ``And sometimes these bills don't even make it out of committee.''
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Publication:Daily News (Los Angeles, CA)
Article Type:Statistical Data Included
Date:Sep 9, 2001

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