Bankruptcy filings up sharply since April

Americans are seeking relief from debt before tougher law takes effect


BOISE, Idaho - Rushing to beat an October deadline, when the biggest overhaul of the bankruptcy law in a quarter-century goes into effect, rising numbers of Americans seeking to have their debts erased have filed for protection in the four months since the law was changed.

Since President Bush signed the new law in April, bankruptcy filings have jumped, particularly in the heartland. Filings in the four months through July are up 17 percent this year over last in Cleveland, 14 percent in Milwaukee and 22 percent in northern Iowa, according to court filings, matching similar patterns in the Midwest and parts of the South and rural West.

Nationwide, bankruptcy filings for April, May and June were up by 12 percent over the same period last year, according to LexisNexis, the data collection service that tracks filings ahead of the quarterly reporting done by the federal courts.

The rise comes after bankruptcy had leveled off and even had started a slight decline last year.

Under the revised law, debtors who earn more than the median income in their state and who can repay at least $6,000 of their debt over five years will no longer be able to have their debts wiped out for a fresh start under the more generous provisions of Chapter 7 of the bankruptcy code.

Instead, they will have to seek protection under Chapter 13, which requires a payback schedule. Under the new provisions, they also will have to enroll in a court-supervised financial counseling program.

The rise in filings, which lawyers and bankruptcy experts say is driven in large part by people who say they fear that it will become much more difficult to escape debt and seek a fresh start under the new law, appears to have caught some bankers and lawyers by surprise.

When the new bankruptcy bill was passed by Congress last spring, bankers predicted it would turn many people away from the protection of the courts by making it harder to extinguish debt. That might still turn out to be the case. But thus far, it has resulted in a rush to the courts in many places.

Bankruptcy filings rose eightfold over the past 30 years, from 200,000 in 1978 to 1.6 million last year. Although filings vary from month to month, court records show the pace for this year, if it holds up, projects to about 1.8 million bankruptcies. The overwhelming majority of them are personal, not business.

Economists say bankruptcy has become more likely as household debt has continued to rise while the savings rate has fallen precipitously. The Federal Reserve reported that household debt hit a record high last year, relative to disposable income.

"Bankruptcies historically have risen with debt, and a lot more people are now living near the edge," said Henry J. Sommer, president of the National Association of Consumer Bankruptcy Attorneys. "What we're seeing now is a rush to get in before October. After that, a certain amount of people will be priced out of bankruptcy."

Courts in Indiana, Nebraska, Ohio, Tennessee, Texas and Wisconsin, among other places, report that people are hurrying into bankruptcy in numbers rarely seen. "I'm probably about four times more busy than normal," said Merv Waage, a bankruptcy lawyer in Denton, Texas. "People are saying, `Honey, we can't pay our bills. We have no choice. We can't live under the stringent new rules. Let's file now before it's too late.'"

Idaho, a state with an otherwise prosperous sheen to its surface economy, is among the per capita leaders in a category that no state will brag about. Filings were up 11 percent for July over the corresponding period last year - on a record pace for the year.

Gordon Barry, a bankruptcy lawyer in Toledo, Ohio, where filings are up 21 percent this year, said, "We've been busier than ever. People are running in, trying to beat the deadline."

The new requirements are an incentive to seek protection now, perhaps the last chance for a relatively hassle-free bankruptcy, some of the newly bankrupt say.

Families with children are three times more likely to file as those without, according to studies done by Elizabeth Warren of Harvard Law School and others, and more than 80 percent of them cite job loss, medical problems or family breakup as the reason.

Consumer groups say the law will only make matters worse for the large number of families who are not abusing the system. They say families will be stuck in "debtor's prison without walls," as the Consumer Federation of America, which opposed the new law, calls it.

Many economists and legal experts say that once all provisions of the law take effect in October, bankruptcies should fall again. And some experts say people will be caught in an endless cycle of debt repayment.

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