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On any given day, walk into an hearing for debtors in U.S. Bankruptcy Court in Miami, and the first thing to strike you is the vast number of people who have fallen on financial hard times. The hearings, conducted a few days each month on the first floor of the Claude Pepper Building in downtown Miami, are packed with consumers who hope the court will wipe the slate clean of their credit card and other personal debts under Chapter 7 of the U.S. Bankruptcy Code. Dozens stream into Room 102 with their lawyers. They sit before a court-appointed trustee whose desk is piled high with dog-eared purple folders. They contain documents that serve as testament to their financial straits. There is the high school custodian who lost his job; the man who saw two business ventures go south, and with them his savings; the self-employed, divorced housekeeper; and the diabetic who lost his job after being hospitalized for 15 days. Every one of the dozens of people in attendance wants nothing more than to make a fresh financial start. Who they are not is perhaps even more significant. They are not the people who those pushing for bankruptcy reform say are manipulating the system. Chances are you won’t find someone in this group who has lived a life like one-time corporate raider Paul A. Bilzerian, who in January declared bankruptcy for the second time in Florida, but who still maintains a $5 million, 11-bedroom estate in the Tampa area. And that is precisely why many judges, lawyers and trustees believe the Bankruptcy Reform Act, which continues to wend its way through political nit-picking on Capitol Hill, won’t work. The legislation, they argue, will not get creditors back their money, because “you can’t get blood from a stone,” says Christian J. Olson, an Oakland Park, Fla., bankruptcy attorney who works for the Law Offices of Richard Simonson. “For most of these people, two missed paychecks can throw them into debt,” he says, while waiting for his client’s case to be heard. Last year, South Florida bankruptcy courts handled 26,589 cases. And that number is growing. In the first six months of this year there were 2,546 more Chapter 7 and Chapter 13 filings compared with last year. Judges and lawyers alike worry that the new requirements will force debtors into more complicated and more paperwork-laden Chapter 13 proceedings, thereby clogging the court system. “It’s reasonable to assume that there will be a fair amount of litigation over whether certain debtors do or do not qualify for Chapter 7,” says Robert A. Mark, the chief U.S. Bankruptcy Judge for the Southern District of Florida. The increased workload aside, the changes as they are currently proposed, will prove to be “a major disaster to the poorest level of our society, who aren’t able to make payments and who have no lobby to look out for their interest,” says A. Jay Cristol, a senior federal bankruptcy jurist for the Southern District of Florida and an outspoken critic of bankruptcy reform. Vetoed last year by President Clinton, the bankruptcy reform bill was reintroduced in January. Its greatest support has come from the credit card industry, which has pumped millions into lobbying for its passage. Their goal is to stem the tide of bankruptcy filings that have surged over the last decade and to extract more money from borrowers whose debts now are simply wiped out. Critics of bankruptcy reform say those behind the bill are pandering to the credit card companies and other lenders who steadfastly refuse to employ any underwrite guidelines before extending credit and then “whine about why they can’t collect from the people they never should have extended credit to in the first place,” says Miami bankruptcy attorney Arthur Halsey Rice of Rice Robinson & Schiller. “It’s disgusting to me that Congress would placate this industry instead of passing some intelligent regulation on the extension of credit,” Rice says. Separate versions of the proposed legislation have passed the U.S. House and Senate. At deadline, a conference committee still had to smooth out the touchy differences between the two versions, notably, the House’s preservation of unlimited homestead exemptions in Florida and several other states. It’s that provision that’s allowed Bilzerian and others like him to keep their extravagant homes. The Senate’s bill includes a cap on the amount of home equity that could be shielded from creditors. For many seeking financial redemption, however, the homestead exemption provision is the least of their worries. Indeed, many don’t even own a home. Their key concern is the creation of a means-testing formula that would be used to determine whether debtors qualify for filing under Chapter 7 or Chapter 13. The latter would require debtors to make restitution over a period of time. Under this provision, anyone who earns more than the state median income for a similarly sized family and who has $167 per month in disposable income, as determined using the Internal Revenue Service’s expense standards, would have to file under Chapter 13. “They are trying to force people into living arrangements similar to IRS standards for debt repayment,” says Robert Furr, a partner with Furr and Cohen in Boca Raton, Fla., and a panel trustee. As a result, he believes people may be discouraged from filing for bankruptcy. “They just won’t pay their bills. They will have to live off cash and hide their assets,” he predicts. Beyond that, the formula is complicated and would be “a cumbersome process if litigated,” says Judge Mark. “It may, ironically, be that the only debtors who can afford to litigate their entitlement to be in Chapter 7 are the ones who do have enough money to be in Chapter 13.” Existing bankruptcy laws are based on models that an honest debtor is entitled to a discharge of his or her debts. But the new law, which requires debtors to qualify for Chapter 7, is based on a “dishonest debtor” model, says Miami bankruptcy attorney Patricia A. Redmond, a partner with Stearns Weaver Miller Weissler Alhadeff & Sitterson in Miami. “It’s guilty until proven innocent,” she says. But those who support the bill, including one of its sponsors, Republican Sen. Charles Grassley of Iowa, insist reform is the only solution to force those who have the ability to repay their debts. “It has been a policy of our bankruptcy laws to let people have a fresh start when they are in financial straits through no fault of their own,” such as after natural disasters or because of high medical bills, Grassley told his colleagues last month during a hearing of the Senate Judiciary Committee. “But when people have the ability to repay, then they should not get off scot-free.” Still the bill’s detractors worry that the legislation could be particularly damning to those who have suffered an illness or other life altering event. Frank P. Terzo, managing director of the bankruptcy and insolvency practice at Holtzman Equels & Furia in Miami, gives this example: Someone’s salary is above the means analysis but they have an ongoing medical condition that may keep them wallowing in medical bills. Because they may still hold down a job, as a result they may make enough to qualify for Chapter 13. “These people may be forced to exhaust their hard-earned money because of something that has occurred in their lives that they have no control over,” Terzo says. The problem is that debt is not a one-shoe-fits-all scenario. “Everybody’s circumstances are so different. It’s hard to drop a set of bright lines that work fairly and efficiently for all consumers,” says Francis Carter, a bankruptcy lawyer and name partner at Ferrell Schultz Carter Zumpano & Fertel in Miami. Though most lawyers, judges and trustees are sympathetic to debtors, not everyone is adverse to the idea that those who rack up bills should be required to make restitution. “I find a certain fairness in the proposition that if you borrowed money, you ought to pay it back and if you can’t you ought to be put through a rigorous standard of proving so,” says Scott Baena, a bankruptcy attorney and name partner with Bilzin Sumberg Dunn Baena Price & Axelrod in Miami. “There is still a perception that there’s something greedy about wanting to get repaid, and I haven’t been persuaded to that point of view yet.” Though he says the new law is “wordy and more complicated,” Baena says it takes Americans “back to a time when it was not so easy to get relief from debt.” Sure, creditors have every right to expect to be paid back, but “this bill goes too far,” says Paul Orshan, a partner with Duane Morris in Miami and chairperson of the Local Rules Revision Committee for the Bankruptcy Court. Instead of taking a law that strongly favors debtors and pushing it to favor creditors, lawmakers should have sought a more middle-of-the-road resolution, he says. “The system merits change. There is no question we have this throw away society,” says Orshan. “The truth is, people should take responsibility.” But, he adds, “this bill may have such a draconian effect, it may have the opposite effect of what it’s supposed to do. In a short period of time there will be so many horror stories that there will be a hue and cry to undo it.”

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