Bankruptcy filings rise as policy-change looms

0 Comments | Deseret News (Salt Lake City), Aug 21, 2005 | by Timothy Egan New York Times News Service

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. The rise is coming 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. In addition, under the new provisions, they will have to enroll in a court-supervised financial counseling program.

Bankruptcy filings rose eightfold over the last 30 years, from 200,000 in 1978 to 1.6 million last year. 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.

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."