When new bankruptcy laws took effect last October, adding time and expense for consumers seeking Chapter 7 protection from their debts, mortgage broker Equity Concepts saw an opportunity.
Bankruptcy law now requires debtors to undergo a means test to qualify for Chapter 7, which shelters them from creditors. If they fail the test – designed to gauge their ability to pay creditors – debtors must file for bankruptcy under Chapter 13 and, therefore, submit to a repayment plan.
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So, Cranston-based Equity Concepts launched WhyFile.net seven weeks ago, offering loans to debtors who would fail to pass the means test for Chapter 7.
“It’s not anything altogether different,” said Wesley Wright, the company’s director of alternative lending. The program just offers home equity and debt consolidation loans. “We set ourselves up so that the worst of the worst [debtors] can be helped here.”
What is different about WhyFile? Wright said the lending program markets directly to attorneys. This is the pitch: Lawyers could avoid the “complications” of the new bankruptcy laws by advising their clients to refinance their debt at Equity Concepts, according to the company’s Web site.
Through WhyFile, Wright said, the mortgage company has forged a referral network of 50 attorneys in Rhode Island and 13 more in Massachusetts. By two weeks ago, he said, the seven-week-old program had given seven loans to people facing bankruptcy.
Signed into law by President George W. Bush last spring, the Bankruptcy Abuse Prevention and Consumer Protection Act strives to close loopholes in the former bankruptcy system.
First, debtors must receive credit counseling 60 days before filing for bankruptcy. And the means test, with some exceptions, excludes from Chapter 7 those debtors who earn more than the median income in their home state – $67,464 for a family of four in Rhode Island – and have $100 or more left after paying mandatory monthly expenses, according to the American Bankers Association.
Despite causing bankruptcy filings to plummet after taking effect, the new laws have had little impact on debtors’ abilities to file under Chapter 7, according to Christopher M. Lefebvre, a bankruptcy attorney with offices in Pawtucket.
In fact, WhyFile’s business model troubled the bankruptcy specialist.
“Simply because, at first blush, you may appear to fail the means test, does not mean that bankruptcy may not have some beneficial value to you,” said Lefebvre. “I am very troubled, and a matter of fact I’m almost offended, with the notion of companies providing [credit] for people who are already inundated in debt.”
Lefebvre, a member of the National Association of Consumer Bankruptcy Attorneys, charged that only lawyers unfamiliar with the new bankruptcy laws would advise clients to seek a loan in lieu of bankruptcy. Yet with interest from “unsophisticated” consumers, the attorney said, WhyFile may have a market.
Creditors, naturally, would rather receive repayment from debtors than chase down dollars in bankruptcy court, according to another bankruptcy attorney.
“There are always advantages to debtors, and frankly their creditors too, if they can avoid bankruptcy,” said Joseph Avanzato, of Adler Pollock & Sheehan, in Providence, who represents creditors in bankruptcies.
“The big question,” he said, “is how risky an extension of new credit is it for this new lender to enter the fray? And how onerous will the lending terms be?”
WhyFile’s Wright said that loans to debtors in risk of bankruptcy would have interest rates 2 percent to 5 percent higher than the prime rate. So what happens if the debtor later seeks bankruptcy protection from WhyFile’s loan?
“If the consolidation results in a higher interest rate than the pre-existing debt, the debtor has got himself in a worse position, because now you have the same amount of indebtedness with a higher interest rate,” Avanzato said.
With multiple creditors seeking repayment, debtors could negotiate lower rates with them to avoid bankruptcy, he said. “But once the debtor consolidates all the indebtedness with one creditor, that creditor has all the leverage in the world, that creditor is holding all the cards.”
