Bankruptcy Bust

Bankruptcy Bust

LEGAL TRENDS by Janet Leiser | Senior Editor

While a steep decline in bankruptcy filings along the Gulf Coast might sound like a good thing for the national economy, some attorneys are not applauding the news.

There has been a 77% decline in local filings as of April 3, and that has caused problems for some bankruptcy practitioners in Central and Southwest Florida. About 4,223 cases were filed in the Middle District of Florida in the first four months of this year, compared to 18,322 in the same four months last year. The area runs from Naples to Jacksonville.

Nationally, there were 116,771 bankruptcies filed during the second quarter of the federal judiciary's 2006 fiscal year that ended March 31, compared to 401,149 in the same period in 2005, according to the Administrative Office of the U.S. Courts.

The national economy's robustness might be the reason for a drop to levels not seen since 1985. But some lawyers say it's most likely due to the new federal bankruptcy rules that kicked in last year.

In the Tampa Bay area, Debt Relief Legal Centers, one of the largest debtor bankruptcy firms, was forced to lay off 30 of its 58 employees earlier this year and close three of its offices, including those in Sarasota and Bradenton, says Richard Feinberg, the firm's managing partner.

Feinberg blames the decline in filings on stricter rules that took effect Oct. 17, as well as what he calls a misperception among consumers that bankruptcy is no longer an attractive alternative, even when the bills are unpaid.

"Bankruptcy is inevitably going to come back," Feinberg says. "It's going to take a little while for people to understand the benefits of the new legislation. Benefits are much more dramatic than before."

Lawyers, both those who work for debtors and those who represent creditors, say the bankruptcy code changes were pushed through by lobbyists for credit card companies and are poorly written and inadequate. Yet the rules aren't expected to be revised any time soon.

Some solo practitioners, such as Robert J. Locker of Fort Myers, stopped accepting bankruptcy clients after the U.S. Bankruptcy Code changed. He says he'd rather focus on other areas of the law that he's more familiar with, and he refers those with financial problems to bankruptcy specialists. He knows colleagues that have closed their Lee County offices because of the drop in business.

Attorney Roberta Colton of Trenam, Kemker, Scharf, Barkin, Frye, O'Neill & Mullis PA, Tampa, says her commercial practice has slowed down since fewer businesses are seeking bankruptcy. "I think people are still trying to figure out the new law and letting others go first," she adds.

Colton expects bankruptcies to go up as real estate developers are squeezed by rising interest rates and slowing property sales, she says, adding, "People have stopped buying real estate to flip it, and that's what was driving a lot of these projects."

Timothy Corcoran III, a bankruptcy specialist and former bankruptcy judge for the Middle District, predicted the decline in filings last year.

"It's much more difficult, it's much more expensive" to seek bankruptcy, says Corcoran in a recent interview. "That means fewer people are going to be able to hire lawyers to do it."

He doesn't agree with the argument that the decrease is due to the run up prior to the new law kicking in.

"We are well beyond that little hiccup, and the fact that filings have continued to decline after such a lengthy period underscores the conclusion that bankruptcy relief is more difficult to obtain and less generous to debtors, whether they be individuals or businesses," Corcoran says.

Attorney Dennis LeVine, whose Tampa firm specializes in work on behalf of creditors, expects May and June statistics to show a rebound in new cases. National statistics show bankruptcies inched upward the last two months, he says.

"Just because they make it more difficult for people to file bankruptcy," LeVine says, "doesn't mean the reasons to file have gone away."

People are still losing jobs, suffering major illness without health insurance and getting divorced, he says.

LeVine doesn't expect national filings to return to the high of 150,000 monthly, but he expects the monthly figure to go as high as 100,000.

Feinberg's firm is spending $10,000 monthly on television ads to let consumers know bankruptcy remains an option for those unable to pay their bills.

LeVine says Chapter 7, or liquidation bankruptcies, aren't more difficult to obtain under the new rules that were intended to reduce fraud and abuse of the bankruptcy system. "We find more people are eligible for Chapter 7 now than were before," he adds.

In addition, Chapter 13, or reorganization plans, eliminate more unsecured debt than under the old rules, he says.

If filings remain low, Corcoran expects lawyers to find new ways to make money. Under President Ronald Reagan's administration, the federal government made a policy choice to stop vigorously enforcing antitrust laws, he says.

"All kinds of lawyers retooled and did something else," Corcoran says. "Ironically, some of them became bankruptcy lawyers."

DECLINING CASES

Bankruptcy filings in the Middle District of Florida, including Jacksonville, Orlando, Tampa and Fort Myers.

2005 2006 % Chg.

January 3,427 748 -78%

February 7,183 1,643 -77%

March 12,524 2,959 -76%

April 18,322 4,223 -77%

Source: U.S. Bankruptcy Court