By Barry R. Hall and Sarah Borchersen-Keto, CCH Washington Staff Writers

Thought the specifics of bankruptcy reform were settled last year when Congress passed legislation and President George W. Bush signed it into law? Think again.

Specific aspects of America's new bankruptcy law, Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, are certain to be challenged in court, especially provisions that tend to "persuade" lawyers through certain built-in penalties to advise their clients to pay off rather than walk away from their debts, according to a panelist at a recent IRS hearing. In addition, Congress is currently considering a raise in filing fees.

While all panelists agreed that the new bankruptcy law attempts to impose accountability upon debtors, David L. Miller, a Salt Lake City, Utah-based bankruptcy practitioner, maintained that it does so at the expense of creating an ethical dilemma for attorneys seeking to advise clients.

The new law has built-in preferences for seeking Chapter 13 filings as opposed to Chapter 7 filings; for example, under the new law, if a U.S. Trustee determines that a Chapter 7 petition should have been filed under Chapter 13, then the cost is to be borne by the petitioner's attorney.

"It isn't necessarily the best way to go, but it's the way Congress wants people to go," Miller said of the built-in preferences. "I always have to counsel the client on what makes sense to them and not to Congress."

Miller added that, "Law firms have already filed law suits challenging the constitutionality of this law."

In discussing the new law's initial impact, Tommy Mathews, the IRS's director of the Office of Advisory, Insolvency & Quality, reported that in the months prior to the new law taking affect in October of 2005, there were marked increases in the total number of filers and the number of Chapter 7 filings. Mathews added that federal records show that current bankruptcy filings--down about 40 percent since last year's pre-October rush--are at the lowest levels since 1985.

Also singled out as significant changes by the panel were the new law's additional attorney disclosure and due diligence standards, as well as the requirements that petitioners file tax returns for the four years prior to filing a petition and obtain secure credit counseling prior to filing and again during the case.

Filing Fees

As Congress considers raising the filing fee for Chapter 7 bankruptcy filings after three previous fee increases, the National Association of Consumer Bankruptcy Attorneys (NACBA) is urging its members to offer free consultation sessions with consumers to ensure that bankruptcy remains available and affordable to those who need it.

During a conference call July 13, 2006, NACBA explained that a measure now being considered by Congress would result in a cumulative 110 percent increase in bankruptcy filing costs since the federal bankruptcy reform law went into effect in October 2005. Congress is now considering a measure to raise the filing fee for Chapter 7 bankruptcy filings by another $40, NACBA said.

The purpose of the proposed $40 increase would be to raise the compensation level for Chapter 7 trustees. Bankruptcy attorney Ike Shulman said that rather than burden debtors by adding another fee, Congress should "determine where all the money now going into the bankruptcy system is being spent and reallocate the existing revenue so that Chapter 7 trustees are adequately compensated."

Consumer Federation of America Legislative Director Travis Plunkett said his organization has no objection to increasing compensation for Chapter 7 trustees, "but we do object to consumers shouldering another financial burden for this pay increase." Congress, Plunkett said, should determine how the funds from the previous increases have been spent, and whether or not access to bankruptcy has been reduced.

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