Bankruptcy Fraud
Bankruptcy Reform Fallout

The new bankruptcy reform law that was implemented October 2005, has resulted in a 76 percent decrease in bankruptcy filings, according to the Sacramento Business Journal.

The interesting fallout is that bankruptcy trustees and bankruptcy attorneys are looking for new jobs and or career changes. An interesting aspect of the new law on the people working in the system.

The article is written by a business publication, so the focus is the business side of bankruptcy, therefore, does not address whether the new law has decreased fraud within the system.

Debtors Wanted

Many lawyers and trustees who had handled bankruptcy cases
are feeling pinched after last year's law change

Sacramento Business Journal - May 19, 2007
by Kathy Robertson Staff Writer

Bankruptcy filings in Greater Sacramento have plummeted 76 percent this year. Chapter 7 liquidations are down 80 percent. For those in the bankruptcy business, it's survival of the nimble.

The numbers -- down precipitously following a huge rush to file before the federal bankruptcy reform law kicked in Oct. 17 -- are expected to climb back to normal levels by year-end. But questions remain: What to do in the meantime and what will the market look like if and when it resurges?

Some have thrown in the towel.

"Thirty percent of bankruptcy lawyers are gone," said Roman Rector, a lawyer who remains one of the biggest filers in the region. "Ten percent retired early. Ten percent now do other kinds of law, and 10 percent quit practice and went to government jobs or other firms."

Four out of 18 local bankruptcy trustees have taken a break, too. These are the folks who shepherd the cases through bankruptcy court. They work on rotation, and are randomly assigned cases as they are filed. Some do it exclusively. Others have other business they do when they're not on rotation. Still others are retired lawyers or judges who put themselves in the line-up because they don't want to be bored.

Antonia Darling Asst. U.S. Trustee in Sacramento, CA

"With a quarter of our normal caseload, four have chosen to go off rotation," said Antonia Darling, assistant U.S. Trustee in Sacramento.

Bankruptcy is the food chain for lawyers and trustees, but it's also big business for the people in debtor education, case management and credit counseling. The bankruptcy reform law is complicated and requires debtors to jump through a few more hoops to discharge their debts.

A trial for some, the new steps mean business opportunity for others. Marilyn Bessey saw it coming. The local company she runs with her son Scott Sackett produced an online consumer education program that helps debtors meet the requirements of the new law.

They are now putting together a new corporation to provide credit counseling.

"I think you have to be nimble," Bessey said. "We could see these new laws were going to change the industry."

Educational opportunity Bessey has a background in consumer education. She taught in Arizona and California before she was hired by River City Bank in 1983 to write an education program to teach seniors how to manage their money.

She got more involved in the bankruptcy market after marrying John Bessey, once a prominent local bankruptcy attorney, and now deceased.

Recruited by Sacramento Commercial Bank, which First Bank & Trust later purchased, Marilyn Bessey and her son developed a sophisticated case-management software program that allows bankruptcy trustees to manage Chapter 7 liquidation cases.

Sackett is a UC Berkeley graduate, engineer and computer whiz. Dubbed BriefCase7.net, the system allows information from the court to flow directly into trustees' computers, cutting out a lot of keyboard work.

At the end of 2002, Bessey and Sackett bought the software from the bank and started a company called Fiduciary Management Technologies. Located at 1 Capitol Mall, the firm has diversified its business to include several other BriefCase products. Clients now range from trustees to receivers, debtor and creditor attorneys, liquidating and disbursing agents, auctioneers and others.

What's been in place will continue, but Bessey and Sackett are stretching the model to tap into new lines of business, too.

"Revenue has grown, but we've done a lot of diversification to make sure it stays that way," Sackett said. "A lot of this is figuring out what is going to happen." One new product is called Smart Money Sense, an online consumer education program approved by the United States Trustee Program that oversees the administration of bankruptcy cases and the trustees who handle them nationwide.

Under the new law, debtors are required to take this kind of class before they discharge their debts. The local company filed for approval in October, when the law hit the streets, and got approval in January.

The product sells at $39.95 per household and offers tips on everything from financial planning to how to balance the checkbook. It is not the only product on the approved list, so Bessey and Sackett market to attorneys and others they know to get debtors to pick the program out of the line-up.

An average of five to 10 orders now come in per day, and demand is picking up, Sackett said. Another business is in the works. The new law also requires credit counseling prior to filing for bankruptcy.

Credit counselors Bessey and Sackett are forming a new local corporation called Financial Education Credit Counseling Inc. to tap into that growing market.

"The stories are terrible," Bessey said. "People go in, take a course and are told they need to use home equity to pay off their credit cards in a debt-management plan, when there is no way to complete such a debt-management plan."

The new company will instead use accountants, bankers and others to provide advice online or by phone. It also will need approval by U.S. Trustees before hitting the market later this year. Here, too, there are already others in the market.

One big local competitor is Los Angeles-based ByDesign Personal Finance Solutions Inc. The Sacramento office, which has about 20 employees, is beginning to see an increase in demand for counseling, both before debtors file for bankruptcy and when they want to finish the process. The pre-bankruptcy piece is just now starting to get traction.

"I'm not sure attorneys were aware of us -- or are now just beginning to file," said company spokesman Donald Rehorn in Sacramento.

Other local folks looked at the market, crunched the numbers and failed to see the promise. "I actually thought I'd start a company," said Sacramento bankruptcy attorney Walter Dahl.

But when he looked into it, he decided otherwise. To offer credit counseling under the new law, companies must be nonprofit, have board representation from outside the industry and give the product away for free if a debtor asks, Dahl said.

"It didn't look like a very good business -- and you potentially have to give it to customers for free," Dahl said. "I'm not sure how Marilyn Bessey and others do it."

Classes now available cost between $45 and $90 and the expectation is that debtors will decide to sign up for a debt management plan and ongoing help to avoid bankruptcy, said Rector.

"But everybody I put in there went on and filed a case," he said. "Not one person took it and went on for counseling."

Rector, Dahl and others expect to wait out the lull instead. Hanging on more than eight years in the works, the new law was not a surprise. The debtors who jammed the courthouse in the last days before the deadline probably included the folks who otherwise would have filed in January or February when their holiday credit-card debt came home to roost, observers say.

Bankruptcy isn't gone, although the public seems to think so.

"I believe the strong will survive," said Sacramento bankruptcy attorney Gerald White. "The changes in the law will not effect the number of people who can't pay their debts and will need relief."

The Administrative Office of the Courts predicts case filings will get back to normal within a year after the new law took effect.

"The question is: What is the new norm?" posed Richard Heltzel, clerk of the U.S. Bankruptcy Court in Sacramento. "Clearly it's different from the old norm."

The numbers are stunning. Only 5,640 Chapter 7 cases were filed in the entire country in November 2005, down from 555,121 in October -- and the overwhelming majority of those were filed in the first 16 days of the month, before the new law kicked in.

"It's a situation where bankruptcy lawyers got to experience life as a farmer," said John Penn, immediate past president for the American Bankruptcy Institute, a nonpartisan organization founded in 1982 to advise Congress and the public on bankruptcy issues. "The crop came in all at once -- and now you have to wait for the next one."

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