The image of a broken bankruptcy system that’s allowing debtors who could repay their debts to get off scot-free is largely a myth in Iowa, say observers within the legal profession.

Some attorneys and court officials who work most closely with personal bankruptcy proceedings say that the proposed changes in the federal law are mostly unnecessary in Iowa, and will only make it more difficult to file, leading to an increase in filings prior to the act’s effective date, but failing to reduce the number of cases in the long run. Additionally, changes in the bankruptcy laws would divert filing fees away from the federal courts to the trustees, which will weaken the entire federal court system while driving up the workload for the bankruptcy courts, one official said.

Under the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, which the U.S. Senate passed earlier this month 74-25, individuals would be required to attend debt counseling and be subject to a means test before filing for Chapter 7 bankruptcy protection, which permits them to discharge most of their debts without any repayment. Those who fail the means test would either have to file under Chapter 13, which would require them to establish a repayment plan, or to drop the case altogether.

“This bill boils down to one point,” its sponsor, Sen. Chuck Grassley, said earlier this month following its passage by the Senate. “If you can pay your bills, you should. If you can’t pay your bills, you are entitled to a fresh start. The sooner the House passes this bill, the sooner our bankruptcy system will be focused as it should be — on helping those with real need and less vulnerable to abuse by consumers who have the ability to repay their debts.”

The House is expected to vote on the bill sometime after Congress returns from its spring recess next week.

The U.S. Bankruptcy Court for the Southern District of Iowa in Des Moines is already seeing an influx of filings from people rushing to beat the legislation, which would become effective six months after it’s signed by the president.

“It will get even worse once the bill is signed and everyone knows it’s signed,” said Mary Weibel, the bankruptcy court’s clerk. “Then after the 180 days, filings will go down because people will be afraid of it. It will take several years for this to shake out.”

Reform of the system isn’t necessary in Iowa, Weibel said. “There are very few abuses, and the U.S. trustee catches the cases that are; that’s their job,” she said.

Regardless of its ultimate impact on the number of filings, the new law “is going to be very expensive for the courts,” Weibel said. In addition to requiring significant software changes for their case management systems, the additional requirements are going to result in far more hearings and work for the courts, she said.

At the same time, the judicial system will begin to lose funding, because the bill would shift a portion of each filing fee — currently $209 for each Chapter 7 case — to the U.S. Trustee’s office, Weibel said.

“The bankruptcy courts generate the majority of the fees for the federal courts,” she said, “so that’s a concern. What the final fallout will be from that, I don’t know.”

For lawyers representing creditors, there won’t be much change if the measure passes, said Gary Norton, an attorney with Whitfield & Eddy PLC. Currently chair of the Iowa State Bar Association’s commercial and bankruptcy law section, Norton has represented creditors in personal bankruptcy cases in the past, and currently has creditor clients in business bankruptcy cases.

“For the most part, the creditors are probably going to see a slower path to bankruptcy, possibly, because of the means testing and the pre-filing counseling,” he said. “But I really don’t see a lot of changes in the long run, because I don’t believe that the abuse that’s perceived in filing is actually happening in Iowa. I think the perception is much greater than reality, in my opinion.”

Whether many more people will file under Chapter 13, which now represents a small percentage of total filings in Iowa, is unclear, Norton said.

“In my experience, there aren’t a lot of people able to do (repay their debts under the schedule required under Chapter 13). They don’t have the disposable income or the assets to do that.”

The revisions to the law would definitely make it more difficult to file for bankruptcy relief under either Chapter 7 or Chapter 13, said Jeff Mathias, a West Des Moines attorney who has represented debtors since 1998.

“My estimate is about 30 to 40 percent of the cases that I have now would no longer be eligible for chapter 7; they would be forced to file chapter 13, if even that,” he said.

Mathias said he doesn’t believe the pre-filing counseling requirement will lead to any reduction in the number of cases, because by the time people decide to file, they’ve already exhausted their other options.

“Most have already been through Consumer Credit of Des Moines and have been unable to make their payments,” he said. “There seems to be an effort to create the perception that a lot of people are taking advantage, and that’s just not my experience.”

Tom Coates, director of Consumer Credit of Des Moines, the state’s largest credit counseling agency, anticipates that his non-profit agency will ultimately get busier if the measure passes.

“I wouldn’t be surprised if we see a lull in that six-month period (following passage),” he said. “There will be people spooked out enough that they don’t even want to weigh their alternatives, and that would be unfortunate. In the long term, we expect additional demand, both from people who don’t have the option to file or who may decide that a payment plan is more to their liking. Overall, we want people to become better stewards of their finances and less frequent users of bankruptcy.”

Consumer Credit of Des Moines currently doesn’t charge for initial counseling, but would likely impose a fee on those referred by the court because relatively few of those clients will end up entering a repayment program. The agency covers most of its operating expenses from monthly fees from the 30 percent of its clients that enter repayment programs, and from “fair share” percentages of amounts it recovers for creditors.

Meanwhile, Mathias and other debtors’ attorneys are seeing a big increase in ther caseloads as people rush to file before the tougher guidelines take effect.

“This is the busiest we’ve ever been,” he said. “We’re completely booked for at least the next 10 days, with about 30 clients scheduled to complete their petition. And I would say demand is at least three times what it normally is.”

Because the new law would require debtors’ attorneys to personally certify the information being given to them by their clients is accurate and make them liable if anything is misstated, Mathias said it’s likely he and other attorneys will resort to hiring private detectives to verify the information their clients give them.

“My practice will shrink dramatically,” he said. “I don’t expect to represent nearly as many people as I do now. I think this is a ‘kill the attorneys first’ law — and let the creditors have their way with the debtors.”