Quiet before storm in bankruptcy court

James Paton, Rocky Mountain News

Thursday, January 11, 2007

The corridors of the bankruptcy court in downtown Denver are calmer than they've been in years.

The number of Coloradans seeking relief from their debt dropped below the 10,000 mark in 2006, down sharply from a peak of more than four times that figure in the previous year, according to new data.

Thousands who otherwise might have waited to declare bankruptcy rushed to beat a fall 2005 deadline. That's when a new law took effect making it tougher and costlier for people to erase their debts.

Now, after slowing to a trickle, the caseload is slowly rising again. Observers think it could return to pre-2005 levels before long.

"The real question is when," said Brad Bolton, clerk of the U.S. Bankruptcy Court in Denver.

The pace has picked up in recent months and now hovers around the 1,000-a-month level, still well below the heights seen in past years.

Many people - initially confused about the headline-making changes in the law - are realizing that bankruptcy remains an option. And all the problems - such as mounting credit-card bills, unforeseen medical costs, job loss and divorce - that drive so many Americans into deep financial holes aren't going away.

Despite the extra fees and hoops debtors must jump through, including credit counseling, many will choose the same well-traveled path.

"People still get sick. They still can't pay their bills," said Kenton Kinnaird, a bankruptcy lawyer in Colorado Springs. "The creditor wants justice, and the debtor wants mercy. People are in the same position they were previously."

In the short term, however, bankruptcy court has been quiet, quite a change from a year earlier. On the Friday afternoon before the October 2005 deadline, the line of people waiting to file at the Denver court ran at least 200 people long.

While bankruptcy attorneys may have fewer cases, they have plenty of work. The cases have grown more complex and time-consuming.

"We're being told by attorneys that they are just as busy as heck," Bolton said.

The law, backed wholeheartedly by banks and credit-card companies, was supposed to steer more people away from the more forgiving Chapter 7, which forgives most debts, and toward Chapter 13, where debtors must stick to a repayment schedule. An individual who earns more than the median income in Colorado and is able to pay $6,000 over five years after taking care of essentials such as food and rent now has to file Chapter 13.

Still, the majority of people who qualified for Chapter 7 under the old system still do, lawyers said.

Jerry Sumner, an attorney in Fort Collins, believes the law does little to crack down on abuse. What it really does is saddle those facing legitimate money problems with added expenses, he said.

"I don't think the law makes a lot of difference," he said. "It just makes it more costly."

Sumner said based on what he has seen and heard, the pace of people heading to bankruptcy court could be back at levels recorded before 2005 within a year.

About 82 percent of Colorado's cases in 2006 fell into the Chapter 7 category, down from 84 percent to 93 percent in previous years, figures from the state court show.

patonj@RockyMountainNews.com or 303-954-2544