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WASHINGTON-Bankruptcy filings surged in the weeks leading up to the Oct. 17 effective date of the Bankruptcy Abuse Prevention and Consumer Protection Act, but lenders expect the long-term benefits to outweigh the initial spike. On April 14, the House passed the bill 302-126 after the Senate had already approved it March 10 by a vote of 74-25. The House and Senate bills mirrored each other, sidestepping a conference, which has been a tricky maneuver in the past. President George W. Bush signed it into law April 20. The latest data out of the Administrative Office of the U.S. Courts showed bankruptcy filings up 10% for the 12-month period ending Sept. 30, 2005. Though business filings dropped, personal filings soared, particularly under Chapter 7 (up 17% for the fiscal year), which the bankruptcy reform law sought to make more difficult to qualify for with the means test; Chapter 7 filers are able to discharge all their debts. Quarterly data showed the increase in filings intensify as the effective date loomed. A newsletter for the federal courts described lines forming at dawn for last minute bankruptcy protection filers, offices remaining open all weekend to accommodate them, and clerks handing out numbers like at the corner deli. The credit union trade associations’ key objectives in pushing the legislation were to establish a means test for Chapter 7 filers; mandate financial education prior to filing; and permit voluntary reaffirmation of debts for credit union members. The law includes these three provisions. According to one industry economist, credit unions felt the sting in October but the November data should be more telling. However, credit unions are typically less into unsecured lending than other lenders and are somewhat more sheltered from a big blow. An article in a local newspaper quoted Shreveport Federal Credit Union CEO Helen Godfrey-Smith on the nearly three-fold increase of filings in the Shreveport, La.-area. She warned that the credit union would likely have to tighten its lending policies and even increase loan rates to help deal with the increase in filings. NCUA supported the bill. In particular, the agency was interested in the `netting’ provisions, which ease the handling of the termination, transfer and netting of financial contracts in a liquidation or conservatorship. The banking and credit union lobbyists were even able to come together on this front. Though the credit union trades portrayed a united front, the credit union community was divided over whether consumers could still obtain the necessary protection and the impact of fraudulent and abusive filings on the institutions’ bottom lines. Despite the overwhelming vote in favor of the bill, consumer advocacy groups ramped up efforts in opposition to the bill at the end. Even after the bill became law, some groups called for repeals of certain provisions in the name of Hurricane Katrina. Credit unions and other lenders are still waiting for the Federal Reserve to develop new disclosures under Regulation Z as amended by the bankruptcy system overhaul. The Fed only issued an advance notice of proposed rulemaking in the last couple of months. The disclosures cover information on minimum payments for open-end lines of credit, like credit cards and home equity lines of credit. The new Reg Z disclosures will have to be telephonic as well as written. The Fed will also have to develop charts to show how long it will take to pay off a debt using minimum payments, which is proving difficult. In addition, the Fed also must provide a toll-free line for members of smaller institutions to call for pay information. -

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