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A provision of the new bankruptcy reform law that requires debtors to obtain prepetition credit counseling is proving to be a major problem in courts around the country. Currently, courts are dismissing far too many consumer bankruptcy cases filed under the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA) because petitioners filing their own cases don’t know about the credit counseling requirement, according to bankruptcy lawyers. At a recent meeting in Chapel Hill, N.C., the Advisory Committee on Bankruptcy Rules-a body of experts that advises the country’s bankruptcy courts on rules and policy-said that the system must do a better job of warning consumers facing bankruptcy that they must get credit counseling before filing a petition. Alan N. Resnick, of counsel to Fried, Frank, Harris, Shriver & Jacobson’s bankruptcy department in New York who took part in the meeting, said that the advisory committee “took steps to require the clerks of the court to warn consumer debtors that they should not file a petition without first getting the credit counseling briefing.” The recommendations, not yet published for comment and requiring the final approval of the Judicial Conference of the United States, include requiring court clerks to provide consumers with a checklist of things they must do before filing for bankruptcy, said Resnick, who also teaches bankruptcy law at Hofstra University School of Law in New York. But even when credit counseling is used, it may not be doing much good. In a report issued last month, the National Association of Consumer Bankruptcy Attorneys, which opposed the bankruptcy bill, noted that of 61,335 consumers seen by six major credit counseling agencies since the new law took effect, only about 3% were in a position to pay back what they owed their creditors. But Rozanne M. Andersen, general counsel and senior vice president of legal and government affairs for ACA International, Association of Credit and Collection Attorneys of Minneapolis, a trade group for the credit and collection industry, said it is too early to tell whether the credit counseling requirement is effective. “We believe very strongly that consumers better educated at the front end and before discharge about their finances and interest and how it is accrued might, just might not to be filing (for bankruptcy) a second and a third time,” Andersen said. So far, a majority of courts has held that the plain language of new law leaves them no choice but to dismiss the petitions of debtors who fail to take this step, despite expressed misgivings for the harshness that the requirement imposes upon many consumer debtors. A circuit court has yet to decide the issue. In an opinionated decision dismissing a case in December, U.S. Bankruptcy Judge Frank R. Monroe of Austin, Texas, admitted that “the court’s hands are tied,” and called the requirement “inane.” He said that referring to the law as a “consumer protection” act is “the grossest of misnomers.” In re Sosa, No. 05-20097 (W.D. Texas, Dec. 2005). On the other hand, bankruptcy courts in New York and Texas have opted to remove the stigma of a failed first attempt by striking deficient petitions rather than dismissing cases. Another issue raised by BAPCPA requirements is a lack of oversight of the credit counseling services they must use. The Justice Department’s U.S. Trustee Program provides a list of approved credit counseling organizations and recommends that debtors contact their local Better Business bureaus before contracting for services. Utah recently passed a Uniform Debt Management Services Act regulating the state’s debt management services. It was the first state to enact such a law, which was drafted and approved last year by the National Conference of Commissioners on Uniform State Laws. Similar legislation is pending in Colorado, Illinois, Nebraska and Rhode Island.

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