Bankruptcy filings surge as law looms

Struggling debtors are rushing to file for bankruptcy before Monday, when a new law that makes it more complex and costly to gain protection from creditors goes into effect.

In the first 11 days of October, more than 2,500 new bankruptcy cases were filed in Massachusetts, compared to 464 during the same period a year ago, according to the clerk's office at US Bankruptcy Court in Boston. More than 1,000 new cases were filed over the long Columbus Day weekend alone.

Bankruptcy Court Clerk James Lynch said he expects the deluge to continue through the weekend. Over the last few weeks, local bankruptcy lawyers say they are filing up to five times as many cases as they normally would.

The new law, passed by Congress and signed by President Bush in April, represents the first major overhaul of the bankruptcy code in more than a quarter-century. Pushed by banks, credit-card companies, and retailers, the changes make it harder for higher-income families -- in Massachusetts, a family of four with income of $85,000 or above -- to wipe out debts through bankruptcy; require debtors to seek credit and financial counseling, for which debtors have to pay; and boost filing fees.

Consumers will feel the greatest impact from the bankruptcy overhaul, specialists said. But the new laws also are less favorable to businesses seeking protection while they reorganize operations, a section of the bankruptcy code known as Chapter 11. Under the new laws, firms will have less flexibility in crafting reorganization plans without interference from creditors, as well as in paying off suppliers.

These and other changes helped persuade Delphi Corp. of Troy, Mich., to file for bankruptcy Saturday. The struggling auto parts maker was negotiating with unions and General Motors Corp., its onetime parent, to restructure contracts and pension costs in the hope of avoiding bankruptcy.

But when it became clear that no plan could be crafted before the new law goes into effect, Delphi filed for bankruptcy in New York.

''It's a highly uncertain regime after that date," said Claudia Baucus, a Delphi spokeswoman. ''Nobody wants to be the first to try out a new law."

Uncertainty also is pushing many consumers to file before Monday. William McLeod, a Boston lawyer, said some of his clients might have tried to hang on longer. But the combination of rapidly rising energy costs, recent increases in minimum monthly credit-card payments, and concerns about the new law pushed them to file now.

''Bankruptcy protection will still be there after Monday," McLeod said. ''But it's going to be an interesting ride to see how this law evolves, how the courts interpret it, and how protected or unprotected people in debt will be."

Individuals and families can file for bankruptcy when they can no longer pay their debts, in most cases because of catastrophic events such as job losses or serious illnesses. The overwhelming majority file under Chapter 7, which wipes out unsecured debts, such as from credit cards.

Currently, after cases are filed, they are reviewed by a bankruptcy trustee, who reviews debtors finances, identifies and sells available assets, and wipes out the debt. If a trustee determines filers can pay at least some debts, they can be sent to Chapter 13 bankruptcy, which requires a plan to pay at least some of the debts.

Chapter 11 bankruptcy is primarily used by companies, which are protected from creditors while they reorganize operations in order to stay in business.

The new law establishes a means test to determine who can file for Chapter 7 bankruptcy, and who must file Chapter 13.

Those with incomes below the median still can file Chapter 7. Those with incomes above the median might still be able to use Chapter 7 if they have high necessary expenses, such as food and clothing, or other special circumstances, such as serious illnesses.

The rest will have to file Chapter 13. Phoebe Morse, the US Trustee for New England, estimates that no more than 15 percent of filers will be required to file under Chapter 13, and likely less than 10 percent. US trustees, appointed by the attorney general, oversee the administration of bankruptcy cases.

''There has been some undue alarm about what the effect of the law is going to be," Morse said. ''For people under the median income, there isn't going to be much change. And even if people have to file Chapter 13, it's still extraordinary relief, often just 10 to 15 percent of what you owe."

Morse added the surge in cases will temporarily increase the workloads of the private attorneys she appoints as trustees to oversee individual cases, but she expects the cases to move through the system expeditiously.

Consumers, meanwhile, face higher costs and additional requirements to file for bankruptcy under the new law. Fees to file Chapter 7 will rise to $274 from $209, although the poorest may get the fees waived. Most consumers also will have to pay for credit counseling, a new requirement to file for bankruptcy, as well as a financial management course, required at the end of the process to have debts settled.

The estimated cost of both: about $100.

Legal fees, which range anywhere from $600 to $2,000 for Chapter 7 cases, are expected to rise at least a few hundred dollars because of the increased complexity of the law, according to the National Association of Consumer Bankruptcy Attorneys.

Robert Gavin can be reached at rgavin@globe.com.