Attorney William J. Delaney has spent 20 years in business and commercial law with a focus on insolvency and creditors’ rights matter. He regularly serves as a court-appointed receiver and has been a bankruptcy court trustee. He recently answered five questions about the bankruptcy system.
PBN: Bankruptcies filed by both businesses and individuals have been on the rise for a few years now. Are those figures showing any sign of leveling off?
DELANEY: It’s continuing to rise. It’s a function of a number of factors right now, including the rising rate of unemployment. We see from all of the industry leaders, all of the industry associations, that the number of bankruptcies and business failures are only going to increase. From a business perspective, now that the first of the year has occurred, small businesses are going to be examining their financial condition and are going to be making some dramatic and drastic changes.
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PBN: How have the tightening of the bankruptcy laws during the Bush administration affected this situation?
DELANEY: It has helped because those who used bankruptcy as the alternative to discharge credit-card debt that they should not have incurred in the first place now are depending on their ability to satisfy what is known as a “means test.”
They will not be able to discharge their responsibilities to a portion of their credit card and other related debt under the revisions to the bankruptcy code. If they do not qualify under the “means test” to totally discharge their debt under Chapter 7, they will instead have to be able to provide a Chapter 13 plan, with the approval of the bankruptcy court, to repay their creditors over up to a five-year period.
The downside is this: As the economy gets worse and people lose their income by which to fund that Chapter 13 plan, they cannot stay in that plan and will more than likely be able to convert themselves to a Chapter 7 liquidation.
[The bankruptcy code changes] are good in that as long as someone has income, they will not be able to be discharged of their decision to incur credit-card debt that they could not afford.
PBN: So the changes are good, for the most part, from a creditor’s point of view. What about the debtors?
DELANEY: First of all, the debtor should be able to afford from a reasoned perspective what they believe their income will be able to support. If you exceed your lifestyle without having a corresponding increase in your income, then the means by which you can afford that lifestyle will be drastically altered.
When I was a bankruptcy court trustee in the ’90s, we had the same problems. We saw a rise in the number of credit card issuers issuing cards to people who had limited means to make the minimum payments. You’re beginning to see the effect now of the credit-card issuers coming back in and altering credit limits on personal cards. That has been going on since at least Labor Day. The credit limits are being reviewed much more carefully now from underwriters in those respective credit card issuing companies. In addition, people who have exemplary credit have randomly received reduction in their limits.
PBN: What effect are these credit-limit reductions having?
DELANEY: You have to budget. The problem is we as a nation don’t like to budget. Unfortunately, when people are beginning to lose jobs, [and when] people are realizing they don’t have the equity in their homes anymore to go take lines of credit to pay down their debt, the means to live at the same lifestyle is drastically altered.
PBN: How have the changes to the bankruptcy laws affected the attorneys who represent the filers?
DELANEY: The practice of law among debtors’ attorneys has dramatically been changed. Lawyers are being held more responsible for the representations made by their clients. There is more scrutiny from the trustee’s office; there is more scrutiny from the courts. The number of [attorneys] representing debtors has decreased. There are more responsibilities, liabilities, possible sanctions against debtors’ attorneys. These lawyers are becoming guarantors of the debtors’ case. The scrutiny places the lawyers in a defense mode they had not experienced before.
Thankfully, Judge [Arthur N.] Votolato [the only judge in the Rhode Island district of U.S. Bankruptcy Court] is aware of the duties and responsibilities placed on the bankruptcy practitioners, and he deals with questions involving the representation of their debtors in a very fair manner. But a number of lawyers are no longer taking these cases, and a number of these debtors don’t have the financial means by which to pay the going rate for representation in bankruptcy court. The going rate is over $1,000. If the debtor had those funds, they wouldn’t have to file bankruptcy in the first place. The Rhode Island Bar Association has a volunteer lawyers program, and they are always asking the Bar for assistance in taking some of their cases.
