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Bankruptcy lawyer Gregory R. Phillips keeps a box of tissues on his office desk for his upset clients. Lately, those tissues have been going pretty fast, he says. A combination of a slowing economy and fear of pending legislation in Congress that would tighten the reins on debtors who file Chapter 7s has led more cash-strapped consumers into his office, he says. “I think there is a clear reason, and that is people are scared into it by the pending legislation,” says Phillips, an Austin, Texas, solo. “Most of these people have not come to see me before because they are trying to avoid bankruptcy.” Fear that they soon will not qualify to file for bankruptcy protection under a legislative rewrite is prompting the office visits, Phillips says, adding, “They are not happy to see me.” Bankruptcy filings are up across the nation, according to a report from the Administrative Office of the U.S. Courts. For a 12-month period that ended on June 30, 2001, a total of 1,386,606 bankruptcy cases were filed in the United States. That’s an increase of 8.6 percent over the previous year. In Texas, 69,137 bankruptcies were filed during that time period — an 11.9 percent increase over the previous year. The rise isn’t much of a surprise to bankruptcy lawyers, especially in North Texas where layoffs at high-tech companies are becoming more common. The Northern District of Texas alone saw roughly a 15 percent increase in bankruptcy filings. It’s much the same story across the nation, says Samuel Gerdano, executive director of the Virginia-based American Bankruptcy Institute. Even in areas where the local economy is strong, job losses, family break-ups or emergency medical costs force people into bankruptcy. “It’s people who ran up debts in the ’90s and are having trouble paying for it now,” Gerdano says. Although it’s difficult to measure, the fear of bankruptcy reform is spurring many of the filings across the nation, Gerdano says. The same legislation was pending at this time last year. “The only difference is you have a president a year ago that was threatening a veto,” Gerdano says. “Where here you’ve got a president who says he will sign it.” The much anticipated bill aims to prevent the abuse of Chapter 7 bankruptcy filings, which allows for a liquidation of assets, except homes and cars, where consumers can rid themselves of debt in one fell swoop. Chapter 13 consumer bankruptcy cases may require a debtor to pay off unsecured loans for up to five years. Chapter 11 filings are for complex business matters while Chapter 12 is reserved for farmers. Yet one U.S. bankruptcy judge in Texas doubts the legislation has anything to do with the filings. The economy, he says, is the primary culprit. “Everybody wants to say that it has to do with the new [proposed] law,” says Richard Schmidt, chief U.S. bankruptcy judge for the Southern District. “But I’m one of those people that thinks that nobody outside of bankruptcy practice knows about the new law.” Besides, if and when the new law passes, it would not take effect for six months, Schmidt says. THE BUSINESS FRONT While the vast majority of increases in bankruptcy filings are driven by consumer cases, there has also been an increase in business bankruptcy filings, although they make up a smaller percentage of the total filings. Total business filings across the nation have risen by less than 1 percent. But business filings in Texas, including Chapter 11 filings for complex business cases, have risen 17.5 percent. One of the largest increases in business filings was in the Southern District of Texas where Chapter 11s have gone from 199 filings in 2000 to 323 in 2001. The reason for the jump is because many Texas businesses have decided to file for Chapter 11 in Texas instead of in Delaware bankruptcy courts, Schmidt says. Many companies are incorporated in Delaware, which allows for out-of-state filings. Some bankruptcy lawyers believe they can get faster hearings in Delaware and that Delaware bankruptcy courts better understand complex business issues. However, docket management rules enacted two years ago in the Southern District of Texas now mirror Delaware, so there’s less incentive to file in Delaware, Schmidt says. “All of the judges have made a commitment in trying to look at these cases and giving them hearings when they need hearings,” Schmidt says. “For the most part, if the case is being well worked by both sides, they have a tendency to move along quickly.” EVERYTHING BUT Texas lawyers who handle business bankruptcies have been busy during the high-tech bust, but several say they’re working on everything except actual bankruptcy filings. “It’s not the kind of frenetic pace where it was at the end of the real estate boom,” says Robert Albergotti, a partner in the business reorganization and bankruptcy group at Dallas’ Haynes and Boone. “We’re a lot busier on a lot of fronts, many of which don’t get to court,” Albergotti says. “We’re concentrating on situations where there are bond defaults … but many of these situations are getting worked out short of having to file.” Evelyn Biery, a partner in the San Antonio office of Fulbright & Jaworski and head of the bankruptcy reorganization and creditors’ rights department, says business bankruptcy filings have held steady in Texas, but not for long. “I think that that’s a temporary situation. I’ve been through three downturns in the economy in the 28 years I’ve been practicing,” Biery says. “And I would be very surprised if we didn’t find a big surge in business bankruptcy filings during the next few months.” That’s because some businesses are teetering on the edge and haven’t been forced into bankruptcy, says Barbara Barron of Austin’s Barron & Newburger, who represents debtors and creditors. Surprisingly, the dot-com companies who went broke last year are not filing for bankruptcy this year, she says. “Given the layoffs at dot-coms, I haven’t seen a surge in tech filings,” Barron says. “Because the [dot-com] assets are so ephemeral, they are not using traditional debt reorganization. They’re doing it out of court.”

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