New chapter in bankruptcy? Not by a long shot…

March 16th, 2010 by Mike Hinshaw

Here’s something different.

Ran across this from the Philadelphia Business Journal, headline “A New Chapter in Bankruptcy.”

The thrust of the piece is that the personal bankruptcy rate is not so bad, given the state of the economy.

Jeff Blumenthal writes in his lede: “With the U.S. economy experiencing its worst downturn in more than half a century, one would think that personal bankruptcy filings would be through the roof. But that has not been the case.”

Good grief. Can we beg to differ?

Bankruptcy filings directly reflect the economic pain 0f  any given region, allowing for regional/cultural differences.

If you’re not following bankruptcies, foreclosures, or credit default swaps, it might be easy to buy into Blumenthal’s thesis.

Here’s some more from Blumenthal:

‘Filings have not skyrocketed’

“Local consumer bankruptcy lawyers said filings have not skyrocketed — though they have increased in each of the past three years — because of a combination of factors. Chief among them are the more stringent law, which makes it harder to file, and new mortgage remodification programs introduced in response to the recession, which have given many would-be filers a reprieve.”

Maybe it’s simply a matter of which end of the telescope you’re using, but looking at some recent headlines from press releases of  the American Bankruptcy Institute, one wonders what it would take for Blumenthal to detect a skyrocket:

Bankruptcy rates about the same as before reform act

Blumenthal seems to hang his argument on the rate of bankruptcy filings before the so-called reform act of 2005. He writes:

“In the decade leading up to the 2005 law’s enactment, annual U.S. consumer bankruptcies hovered between 1.1 million and 1.6 million filings. Those numbers rose to 2 million in 2005 as people rushed to file before the law was enacted that fall. With so many people having already filed, there was a 70 percent drop off in 2006 consumer filings (597,965). Then, with the mortgage crisis hitting in 2007 followed by the 2008 stock market collapse, filings began to jump again — by 40 percent in 2007, 33 percent in 2008 and 32 percent last year. But the 1.4 million filings in 2009 was still only on par with the numbers prior to the law’s enactment.”

Dumbfounding.

Rates dropped 70 per cent after law changed

Let’s get this straight. After the credit card lobbyists succeeded in making it tougher for people to file for bankruptcy protection (and a rush to beat the new law’s deadline), “there was a 70 percent drop off in 2006 consumer filings. . . .” OK, so isn’t that the new baseline?

In other words, the lobbyists won. Which gave us a new landscape, which even Blumenthal seems to concede is a harsh environment for those who most need protection. Here he mentions an authority on bankruptcy law in Pennsylvania (emphasis added): “Henry Sommer, the dean of the Pennsylvania consumer bankruptcy bar, estimated total costs of filing have gone up from about $900 or $1,000 to about $2,000, which he said is too big of a burden for many low-income people. He said lawyer fees are also higher because more paperwork is required. Debtors must provide salary history and bank and tax statements. Sommer said some people who used to be able to tap into more equity or 401(k) plans to stave off filings can no longer because those funds have been eaten away by the recession.

“It used to be simple to prepare,” Sommer said. “Now, it’s a lot more complex.”

Recession-era rates soar to pre-reform levels

So really what we’re seeing is that despite the stricter requirements, higher fees, built-in delays and increased complexity of the “reform,” the number of people seeking bankruptcy protection rose “40 percent in 2007,” another “33 percent in 2008″ and then another “32 percent last year.”

Perhaps the March 2 PR from ABI says it best: “While Congress and the Obama administration continue to consider measures to reduce high unemployment and mortgage burdens, families with increasing debt loads have little choice but to continue to turn to bankruptcy for financial relief,” said ABI Executive Director Samuel J. Gerdano. “Consumer filings this year will likely surpass 1.5 million filings, or the same number of annual filings averaged in the years leading up to the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005.”

In other words, the Great Recession is so bad that the consumer bankruptcy rate has soared back to pre-reform levels, and now there’s more people who need the relief but can’t afford it.

Not much of a “new chapter,” is it?

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The bankruptcy reform act of 2005 increased the complexity of the law, but if you are overwhelmed by debt, filing for bankruptcy protection may be your most pragmatic alternative. If you are facing foreclosure of your home (sometimes referred to as your “primary residence,” as opposed to a second home, or “vacation home”),  bankruptcy protection may be your best route to saving the home. If you are struggling with medical bills, you may be in a special category for setting debt aside, and if you have problems with credit-card debt, you should be aware that some of those laws have changed recently, too. Whatever you do, before making major, life-changing  financial decisions, consider consulting a trained, experience attorney. For bankruptcy basics, please see:

Principles of bankruptcy

Basics of bankruptcy

Introduction to Chapter 7

Introduction to Chapter 13