A Clean Start Isn't So Clean Anymore in Washington

A family member has an illness that requires a lengthy hospital stay. She recovers nicely, but with whopping medical bills and meager health insurance, your chances of financial recuperation look slim.

A year ago, you might have been able to file for bankruptcy and get a fresh start. Now it’s not so easy.

If you make more than the median income (in Washington state, that comes to about $71,000 a year for a family of four), you will now find it much harder to file a Chapter 7—which wipes out all the covered debts right away. If your household earnings are above average, and you can pay at least $100 after basic expenses, you now have to file under Chapter 13, which Noel Shillito, a partner with law firm Shillito & Giske in Tacoma, refers to as a “mom-and-pop payback plan.”

You’ll also be required to take a one-hour credit-counseling course.

Before a new federal law restricting personal and business bankruptcies took effect October 17, 2005, there was a mad rush of filings across the country. The number of bankruptcy filings in the first half of September 2005 was up about 50 percent over the previous year, according to an Associated Press story.

But so far, the effects have not been as extreme as predicted—in part, because so many people on the verge of bankruptcy rushed to beat the buzzer.

“The changes in fact have turned out to not be as draconian as we thought they might be when the law was being modified,” says Sheena Aebig, a bankruptcy lawyer in the Seattle offices of Williams, Kastner & Gibbs. Bankruptcy judges, she says, have some leeway “to ameliorate some of the potentially harsher consumer provisions.”

Adds Shillito, “Most Chapter 13s don’t pay back everything. They pay back what you can afford to pay back” of unsecured debts, such as credit-card balances, medical bills and signature loans. “I might be in a plan for five years paying $400 a month, $600 a month—that’s the money left over after I’ve paid my basic living costs that I can pay into the plan—what we call our ‘disposable income … Generally speaking, when you file a Chapter 13 you continue making your mortgage payments and your car payments.”

Regardless of which version of bankruptcy a person uses, a lot more paperwork is required under the new law, so expect to pay double or more the legal and accounting fees you would have under the old rules.