08:28 PM CDT on Sunday, April 23, 2006

Six months after a tougher consumer bankruptcy law went into effect, a picture is beginning to emerge of the debtors who have undergone required credit counseling and education before they file for bankruptcy:

Those who sought help from Consumer Credit Counseling Service of Greater Dallas had an average gross income of $34,200 and an average $13,400 in unsecured debt and five credit cards.

"Those who are filing now really are those who are legitimate candidates for bankruptcy," said Bettye Banks, senior vice president of education at Consumer Credit.

It took Congress a decade to pass legislation aimed at tightening federal laws governing personal bankruptcy.

The lending industry, which is pleased with the new law, said change was sorely needed to stem the rise in bankruptcies – particularly abusive filings.

But consumer advocates and bankruptcy attorneys said no one who files for bankruptcy is happy about it, and most have been driven to it by a job loss, divorce or health problems.

They said – and still say – that aggressive lenders are partly to blame and that bankruptcy laws should continue to protect the weakest members of society from a life of indebted servitude.

They say the law is harsh, ambiguous in many aspects, and makes it harder for consumers who really need a fresh start from taking advantage of bankruptcy laws.

The bankruptcy law, which took effect last October, makes it harder for consumers to wipe out their debts by filing under Chapter 7 of the U.S. Bankruptcy Code.

Instead, most people will be steered toward Chapter 13 and a repayment program with their creditors.

Before they file for bankruptcy, debtors must undergo a two-part credit-counseling and financial education program.

The first is the pre-filing session during which the credit counselor goes over the client's income, assets, liabilities and expenditures.

Credit counselors also will go over the qualifications for bankruptcy filing and the difference between Chapter 7 and Chapter 13. They also explain the advantages and disadvantages and alternatives to bankruptcy.

Ultimately, it's the client's decision whether to file for bankruptcy.

The second session, called the pre-discharge session, takes place after the debtor has filed for bankruptcy.

During that session, which must be completed before debt is discharged, the debtor will learn money-management skills.

Nationally, debtors who received pre-filing counseling had average debts of $40,673 and an average income of just $31,255, according to a survey by the National Foundation for Credit Counseling, the umbrella organization for Consumer Credit Counseling Service agencies.

"The people we're seeing are dealing with job loss, loss of income or reduced income, and catastrophic illness," Ms. Banks said.

"Fear and lack of knowledge led them to think bankruptcy was the only option. Sometimes it shouldn't be the first option. It should be something you should consider as a last source."

That didn't occur last year for many debtors, as they rushed to the courthouse to file for bankruptcy before the new law took effect.

Consumers filed for bankruptcy in record numbers last year, resulting in one personal bankruptcy for every 60 households, according to the American Bankruptcy Institute.

"The latest report underscores the level of financial stress for U.S. families," said Samuel J. Gerdano, executive director of the institute.

"It also reflects the fear, if not panic, surrounding the effect of the new bankruptcy law."

Many consumers believe bankruptcy is no longer available because of the new law, said Bradford Botes, executive director of the National Association of Consumer Bankruptcy Attorneys.

"The law is not working," he said.

"It is making things worse. It's much more expensive. Court-filing fees have gone up from about $200 to $300 to file for bankruptcy right now."

Though he sees the value of credit counseling and financial education, Mr. Botes said those aren't the remedies for every debtor.

"Not everybody who files bankruptcy is there because of poor financial planning," he said.

"People file for bankruptcy because of significant medical events, huge medical bills, time away from work, or the husband or wife loses a job that causes a significant loss of income.

"To tell those people that they need to go through a class to learn how to use their money properly is mean-spirited and wrong and a waste of time and money," Mr. Botes said.

But clearly, there are people whose spending habits got them into trouble.

The survey by the National Foundation for Credit Counseling found that the biggest reason consumers find themselves facing bankruptcy is poor money management.

"People haven't learned to manage money yet," Ms. Banks said.

"There's still a huge, huge core of consumers who don't want to stop spending. We still live in the land of $1,000 millionaires – you're making thousands but spending millions."

E-mail pyip@dallasnews.com