Vol. 82, No. 7, July 2009
As we all know, the fall-out from the weakened economy has been swift and deep. From rising unemployment to collapsing banks and automakers and an erosion of the housing market, everyone seems to have felt the pinch over the past year.
Another fallout has been the rise in bankruptcy filings. In Wisconsin’s federal bankruptcy courts, the numbers tell the story. In the Eastern District, the number of bankruptcy filings from January 2009 through April 2009 was more than 33 percent higher than over the same time a year ago and more than 86 percent higher than over the same time in 2007. The number of the most common filings, Chapters 7 and 13, is up 27 percent from a year ago.
Meanwhile, in the Western District, the number of filings from January 2009 through March 2009 was more than 33 percent higher than over the same time a year ago and more than 62 percent higher than over the same time in 2007.
Milwaukee bankruptcy judge Pamela Pepper says the filings keep climbing. “The economy has been brutal on the people we see. We are seeing people facing the loss of their homes – people with traditional, 30-year, fixed-rate mortgages, not just the subprime loans. If one member of a couple loses a job, or has hours cut, that can devastate their entire budget.” Judge Pepper says people who are supporting themselves, their children, and their grandchildren on a $698-per-month SSI payment are coming into bankruptcy court.
Claire Ann Resop is a bankruptcy trustee in Madison and sees similar circumstances as Judge Pepper is seeing in Milwaukee. “I see more debtors who are in their 40s and 50s who have lost their jobs and are unable to replace the income in whole, or in part. I see a higher percentage of debtors who own real estate, largely without any equity. Things are worse than they were in years past. There is more bankruptcy work, but there are fewer assets to liquidate and pay to creditors.”
What do all these numbers tell us? More consumers are turning to bankruptcy in Wisconsin and as a result more lawyers are taking bankruptcy cases.
As I have mentioned in previous articles this year, some lawyers who have not previously handled bankruptcy cases have now decided to do so. Who can blame them? It appears to be a burgeoning area of practice. For some lawyers, it’s a way to make up for the income they are no longer getting from other areas of practice. A new potential revenue stream is always good for business. But a warning must come with it: Proceed with caution!
Know the Law
Many attorneys who are now handling bankruptcy cases are brand new to this area of practice. Dabbling in an area of law in which you have never previously practiced can be dangerous. Doing it in a complex area such as bankruptcy heightens the risk. Tom King is a bankruptcy trustee in Oshkosh. “It is never wise to get into an area without knowledge. Newly admitted attorneys, most of whom are young, benefit from working with more seasoned counsel,” he says. Resop agrees. “Bankruptcy holds traps for the unwary. There is always a learning curve for attorneys to know the written rules and the unwritten rules of practicing bankruptcy. The bankruptcy court and bar are supportive of their fellow practitioners and provide assistance and opportunities for education and sharing of ideas.” If you are new to bankruptcy practice, take advantage of that assistance.
Judge Pepper recommends getting a mentor. “Going into any new practice area without experience can be risky. In the world of consumer bankruptcy practice, it can be fatal not to understand certain things.” For example, if a pending bankruptcy case was dismissed for your clients in the year before the date you filed their current case, then they get the protection of the automatic stay for only 30 days after filing, unless you file a motion asking that the stay be extended. And that motion has to be filed and heard within 30 days after the petition is filed. Judge Pepper says, “Miss this boat and your client finds himself or herself without the protection of the stay.”
Mary Grossman, a bankruptcy trustee in Milwaukee, says that if this happens, creditors can commence with foreclosure or repossession. “Attorneys who are new to bankruptcy practice or are returning to it after years away often do a real disservice to their clients. The ramification of errors can be severe, including loss of a residence.” That, of course, can lead to a malpractice claim.
Judge Pepper says if you’re a novice in bankruptcy practice, finding guidance is not that difficult. “Bankruptcy lawyers are, as a general rule, a generous and helpful lot, and finding a mentor will help newcomers avoid some of the more disastrous mistakes.”
Things Have Changed
In addition to the attorneys new to bankruptcy practice, many attorneys who previously practiced in the area are now returning for economic reasons. But the bankruptcy world they find today is different than the one they left behind, even it if was only a few years ago.
Thomas J. Waston, Marquette 2002, is senior vice president and director of communications at Wisconsin Lawyers Mutual Insurance Co., Madison. Contact him at Tom.Watson@wilmic.com.
The federal bankruptcy laws changed in 2005, thanks to the passage of the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA). The changes placed additional burdens on debtors and their attorneys, and some attorneys decided it was time to get out. Now some of them are back. Judge Pepper cautions returning attorneys to be careful. “This area of practice has changed a great deal since the 2005 changes. People who practice bankruptcy regularly have begun to get used to those changes, but those who are returning to the practice might find it quite different. There are more ways for a debtor to slip up, and the consequences can be more drastic.”
King says there are more requirements as a result of the 2005 legislation. As a result, he says, “there is more exposure for attorneys. Since there is more risk and more work required, fees have risen.” That makes bankruptcy work more attractive to lawyers, but the added responsibilities and risks must be kept in mind.
Grossman says in addition to more complex laws, bankruptcy issues have become more challenging too. People you never thought you’d see in bankruptcy court are now there. “I am seeing filers with six-figure family incomes and expensive houses and high mortgage payments. Bankruptcy attorneys have some real challenges with such debtors if there has been a recent decrease in family income. The ‘means test’ that determines the amount that debtors must pay to their general unsecured creditors is based on income for the six full months before filing. If the debtors suffered a loss of income after or toward the end of that period, they may not be able to afford to make the payments required by law. Often, delaying the bankruptcy filing is not an option because of a pending foreclosure. This creates a difficult problem for attorneys representing these clients.”
Grossman also says that now, more money and higher-valued assets are at stake. “The amount of pre-petition mortgage payments owed has become astronomical – often $30,000 to $50,000 or more. For car loans, debtors frequently have loan balances far in excess of the car’s value; the loan balances can be quite large for a run-of-the-mill vehicle.”
In Chapter 13 plans, in which debt is reorganized and payment plans are structured, Grossman says the combination of large mortgage arrearages and large car loans that must be paid in full results in much larger Chapter 13 payments. “Until late 2005,” she says, “it was unusual to see a Chapter 13 plan that proposed a monthly payment of $1,000 or more. Now, debtors often propose plans that call for payments of $1,000 to $2,000 per month or more.”
Pro Se Litigants
The complexity and volume of cases also has been a burden on bankruptcy courts. Court calendars are full, and judges and trustees have plenty of work. The attorneys representing filers do, too, and that is one reason more attorneys are back handling bankruptcy cases.
Judge Pepper says because of the increasing number of cases, courts are seeing people every day who desperately need counsel to represent them. Judge Pepper says that although most people filing bankruptcy petitions in Wisconsin are represented, there are still a few pro se litigants who need help. “Not enough of these people we see every day are represented by lawyers. Most of the ones who are not represented tell us that it is because they can’t come up with the fees that lawyers request.”
Those who do go it alone make it much tougher on the courts. King says, “Pro se cases waste court and trustee time without a benefit to the debtor, who often cannot comprehend the requirements that must be met.”
Judge Pepper agrees that pro se cases can be difficult. “We spend a lot more time working with people who don’t have attorneys, because they have the most questions and are the most likely to make mistakes in filing. I think from the judges’ perspective, we are concerned to see so many people coming through the system who don’t understand it and don’t have help understanding it. Sometimes there are things the law allows us to do to help them. Other times, our hands are tied. If they had a lawyer’s assistance, they would be more likely to avoid the kinds of errors that we, as judges, are powerless to correct.”
That brings us back to the need for attorneys to represent the soaring number of bankruptcy clients. There is no question there is a need out there. But should a lawyer who has never practiced bankruptcy law or a lawyer who hasn’t done it in many years take on this work? Judge Pepper says more attorneys helping in this area can be a good thing, as long as they know the law. “If the new or returning person has done his or her homework, and gotten a handle on the law to some extent, then having more attorneys practice in this area can be a real boon to the litigants who need help and it’s probably a good idea.”
As with any area of law, however, be diligent in your representation. Make sure you are careful about the clients you take on; research the law, especially the 2005 legislation; and seek guidance from a colleague or mentor. Adding business to your practice can be a very good thing, but it would not be worth it if it resulted in a malpractice claim down the road.