Late last month, we discussed slightly encouraging reports showing that unemployment may be starting to turn around.

But now we see that bankruptcy filings are rising again.

“More Americans filed for bankruptcy protection in March than during any month since the federal personal bankruptcy law was tightened in October 2005, a new report says, a result of high unemployment and the housing crash,” says an April 1 piece in The New York Times.

Today Time magazine reports, “There were 158,141 U.S. bankruptcy petitions filed last month — a 35% increase over February’s figure, according to data compiled by Automated Access to Court Records (AACER). This was a 19% increase over the number in October 2009, the last record-high month,” .

Bankruptcy filings called less newsworthy

In fact, so many people have been pushed into seeking bankruptcy protection that at least one local news outlet has changed its reporting policy. In an April 4 brief, the Peoria (Ill.) Journal Star says it has quit publishing weekly reports on personal bankruptcy:

” ‘We have taken a careful look at the publication of this information and have come to the conclusion that, in today’s economy, publicizing personal bankruptcies no longer holds the news value it may have a few years ago,’ Journal Star Managing Editor John Plevka said.”

The Journal Star said that it “still may report on personal bankruptcies involving prominent Peoria-area residents and will continue to report significant bankruptcy filings of local businesses and corporations.”

As might be expected, the decision drew a cross-fire of comments–by about 1 a.m. today, the post had elicited 29 comments, (with more combined words than in the original post) ranging from schadenfreude-laced skepticism about the Journal’s real  reasons (“Too much work?? If bankruptcies no longer hold news value, neither do DUI’s and property transfers.”) to those questioning the intent of readers who followed such news (“In my experience the only people interested in reading the bankruptcies are nosy old women with nothing better to do than glean some misguided satisfaction at the expense of those less fortunate. . . .”).

AACER President ’suprised’

The Time account compares the rate of filings in about a quarter of the states, from the first three months of this year to last year’s monthly averages, and quotes the AACER president as expressing surprise: “In the first quarter of 2010, the rate of personal bankruptcy filings in a dozen states increased by double-digit percentages over 2009’s monthly averages. ‘What is surprising is that there are still hefty increases in states like Arizona, California and Florida,’ says AACER president Mike Bickford, referring to the fact that it might seem that the worst would be over in states hard-hit by the housing bubble. ‘Intuitively, you would think there might be some leveling off in these states, but that is not the case. In addition, there were large increases in bankruptcy filings in the Midwest, especially Michigan and Illinois.’ ”

The NY Times also quotes Bickford, in reference to what many consider the irony of the astounding numbers of filings, given the credit-card lobby’s apparent success in 2005 when it persuaded Congress to pass the Bankruptcy Reform Act: “ ‘Even with the restrictive new law, we’re back up over where we were before the law changed,’ [said Bickford] . . .  in a phone interview Thursday from his headquarters in Oklahoma City. He faulted the stagnant economy, saying a surge in bankruptcies generally follows economic contraction by 6 to 18 months, and he pointed to March as a historically busy month for bankruptcy filings.”

Longtime “Bankruptcy Corner” readers won’t  be surprised to learn that Chapter 7 filings are way up, despite the credit-card lobby’s intent; we’ve been covering the topic for more than a year.

The Time piece also addresses the myth of “the deadbeats” who hide behind bankruptcy laws to game the system.

Myth of the deadbeat

“Katherine M. Porter, a bankruptcy expert at the University of Iowa and the University of California, Berkeley’s Boalt Hall Law School, says people typically ’seriously struggle’ with their debt for two years before turning to bankruptcy.

“The statistics show that Chapter 7 bankruptcy filings are rising faster than the more complex Chapter 13 filings. While the latter requires individuals to repay a substantial portion of their debt and prevents banks from foreclosing on their homes, Chapter 7 bankruptcy allows a debtor to wipe out his or her debts entirely and get a fresh start. ‘It is very fast and very deep debt restructuring,’ says Porter. Since 2005, Chapter 13 filings have dropped from about 35% of all personal bankruptcy filings to 25%, she says. ‘Systemically, that’s a big change.’ ”

What’s she’s addressing is that Chapter 13 is usually the choice for filers who wish to save their homes from foreclosure, while Chapter 7 can involve liquidation of assets but a much quicker discharge from bankruptcy and into a fresh start. However, it’s not written in stone that a Chapter 7 bankruptcy always results losing the home: Depending on your state law and your unique financial situation, filing Chapter 7 might allow to keep your home–that’s why it’s so important to discuss your situation with a trained, experienced bankruptcy attorney.

Chapter 7 filings now ‘73 per cent’ of consumer bankruptcies

The NY Times says that “[s]tatistics from the United States Trustee Program . . . show that Chapter 7 filings as a percentage of all bankruptcies have increased to about 73 percent in 2009 from about 62 percent in 2006-07. Of the 158,141 bankruptcy filings in March, 118,505, or 75 percent, were Chapter 7s and 38,241 were Chapter 13s, the Aacer report says.”

Both pieces agree that the indications are that more people are choosing to walk away from so-called “underwater mortgages.”

Like Bickford, Porter was also quoted in the NY Times: ” ‘We think that means fewer and fewer families think they’re really going to save their homes,’ Professor Porter said. ‘They don’t have any equity, so why try to keep up with their home payments?’ ”

Reform the reform?

From this point, the Time piece circles back to the reason why the Bankruptcy Reform Act should, itself, be reformed. Again quoting Porter: “Under current bankruptcy law, Porter says, bankruptcy courts have ‘no tools to reduce the principal, stretch out the payments or adjust the interest rate’ — that is, since judges can’t adjust mortgages to make them easier to pay, people end up ditching them instead.”

The inequity of the bankruptcy code’s inability to protect a primary residence–although it does allow loan mods for luxury items–has been decried by consumer advocates (here’s some thorough background from the AARP) and scholars alike. Here’s our coverage of work done by Adam J. Levitin,  first posted here, expounded upon here and revisited here.

So even though it took a special report to outline serious shortcomings of Team Obama’s HAMP plan, and banks such as Bank of America have finally realized the common sense approach to reducing mortgage principal, the latest bankruptcy rates seem to indicate that our largest institutions simply move too slowly, and arrive with help too little, too late.

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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

Fibs, lies, and statistics: the old saw popularized by Mark Twain, and said to trace to Disraeli, is certainly a jumping-off point for recent news and discussions.

Case in point–are we turning around the financial crisis? Or not?

Recapping a Reuters Television appearance today of the outgoing Morgan Stanley John Mack, CNBC posted the headline, “Worst Over for World Economy: Morgan Stanley CEO.” And here’s a Sept. 15 clip of Fed Reserve Chairman Ben Bernanke saying he thinks the recession “has very likely” bottomed out. More optimism is borne out in the equities market, with one CNBC account mentioning “the meteoric run-up” of the current stock rally while a CNN piece says “Stocks flirt with new highs.”

But more headlines today paint a darker picture for folks needing jobs, with Bloomberg’s saying two states hit record levels of unemployment, CNBC’s saying three hit record levels and CNN’s take that five states breached the 12 per cent mark.

Bloomberg says: “Unemployment rose in 27 U.S. states in August, with California and Nevada reaching record levels of joblessness.

“Rhode Island rounded out the list of states with the highest level of unemployment since data began in 1976, the Labor Department reported today in Washington.

“California’s unemployment rate reached 12.2 percent and Nevada’s climbed to 13.2 percent.”

Despite their differing headlines, the CNBC report pretty much agrees with the Bloomberg view, adding that overall the rate “. . . rose from July in 27 states and the District of Columbia, declined in 16 states and was unchanged in seven others, according to the Labor Department.” CNN agreed with CNBC about the record levels in three states, chipped in that five states “posted jobless rates above 12% in August,” and summarized the states with best unemployment news: “North Dakota posted the lowest jobless rate in August, at 4.3%. It was followed by South Dakota, at 4.9%; Nebraska, with 5%; Utah, at 6%, and Virginia, at 6.5%.”

CNN also included an explanation by way of an econmist at Wachovia. “The losses tend to be heavy in states that have a high concentration of manufacturing jobs or were hit hard by the housing bust,” said Mark Vitner, economist at Wachovia. “The states with the lowest rates tend to have fewer metropolitan areas,” . . . Vitner said.

“When you consider how a city like Las Vegas dominates Nevada’s economy, you can see how that weakness could devastate a state.”

So all that kinda makes sense. To be fair, when Bernanke told the Brookings Institution, “From a technical perspective, the recession is very likely over at this point,” he also cautioned that new economic growth will not keep unemployment from rising.

And when Mack said in Russia that “The good news is that I believe the economic fear, the crisis is over,” he also was paraphrased by CNBC as saying “the capital markets [are] open and all asset classes now [have] liquid markets except for securities backed by commercial real estate assets and residential mortgage-backed securities.”

It does seem a little odd that lack of liquidity for the latter two asset groups is not so much a problem, given the blame laid directly on the hearths of millions of troubled households that got swept up into dizzying arrays of securitized “tranches.” But I suppose they’re both saying Our Fat Lady of  the Crisis has sung, so now we wait and wade through the aftermath of the lag-effect and hope that our clients and bosses and contractors start hiring again.

What I still don’t get is the myriad views of how we got here and why U.S. consumers don’t have some legal whiz cueing up for a class-action lawsuit to the tune of Big Tobacco Got Slammed–Why Can’t We do Some Slamming, Too?.

For example, I read “The Failure of Bankruptcy Reform” in a Sept. 15 “Business” post at The Atlantic and wonder how on Earth the U.S. screwball Senate gets away with refusing to go along with the move to fix the Bankruptcy reform act of 2005.

As  Mike Konczal writes: “The goals of the controversial 2005 Bankruptcy Reform were to both lower the number of those filing bankruptcy and also to increase the amount recovered post bankruptcy by forcing consumers into Chapter 13 bankruptcies. Seeing the latest data, it is clear that both of these goals have been failures–however the unique way in which they have failed is worth investigating.”

Part of the credit-card industry’s message was that w-a-a-y too many shiftless plebes were abusing the Bankruptcy Code by filing Chapter 7 petitions and thereby skipping merrily lah-de-dah into the guilt-free twilight for yet another round of consumer excess–oh, and, uh…also stiffing the erstwhile credit card companies who were simply doing their patriotic best to provide retail-level liquidity. How do we spell “moral hazard”?

As Bankruptcy Corner readers know, the number of recent Chapter 7 filings has astounded and confounded experts. But what I’m only now learning is the stated goals of the act may not have been the actual goals. (I know–dumbfounding, right?)

As Konczal explains, if the metrics were such that the credit-card industry were paying its lobbyists to reduce bankruptcy filings overall and to steer the remainder toward Chapter 13 filings, why then it’s pretty obvious that it’s been a dismal failure. In that light, he asks, “Since lobbying is costly, if you were the CEO of a credit card or financial company, would you have fired the team responsible for writing this bill for Congress?”

And the surprsing answer?

“Actually no,” writes Konczal, “you’d give that team a giant raise.”

Huh?

Well, it turns out that actual goal may have simply been to string out consumers, to put hurdles in the bankruptcy filing process.

Again, Konczal: “Many of the features of the bill–including ‘credit counseling’, raising filing fees, debt-relief agencies, etc.–are designed to raise the time barrier between financial distress and the act of filing a bankruptcy. And what happens during that time? The person in question is paying triggered high-interest rates on credit card loans.”

And where is Konczal coming up with these crazy notions? From Ronald J. Mann, an award-winning author, scholar and professor of law, who wrote a little essay back in 2006 called “Bankruptcy Reform and the ‘Sweat Box’ of Credit Card Debt,” which you can read here or here.

Now, just to be clear, Mann does not seem anti-credit card, at least not in a Dave Ramsey sort of way. Indeed, in Mann’s conclusion, he says straight up: “The credit card is perhaps the most important financial innovation of the twentieth century; it introduced substantial efficiencies in both payment and borrowing markets.”

However, that insight is immediately followed by this (numerals indicate his footnotes): “The credit card, however, is associated with increases in spending, borrowing, and financial distress.117 It is not clear why that is the case, although academics have suggested it may be due to cognitive impairments, compulsive behavior, unfair advertising, or fraudulent contracting practices. Reform-minded governments around the world currently are struggling with how to respond to the problems with credit cards without undermining the efficiency of payment and lending markets.119″ Some responses focus on the payment functionality. Because credit cards might encourage consumers to spend too much, and perhaps more than they can repay out of monthly incomes, credit card use can lead to unplanned debt.”

A few lines following he writes, “Because the credit card is so easy to use (that is, the transaction costs of credit card lending are so low), borrowers underestimate the risks associated with future revenue streams. The response is to intervene in the market for consumer lending or adjust the types of relief available in bankruptcy.121

Although policymakers around the world are loosening the rigor of their consumer bankruptcy systems—in large part due to the introduction of American-style consumer credit—the legislative desire to protect the credit card’s unique place in the U.S. economy was one of the most important motivations for the bankruptcy reform statute. Oddly enough, the credit card industry successfully convinced bipartisan majorities in both the House and Senate that there were serious deficiencies in the American bankruptcy system within which the card has had its phenomenal success. Thus, the central idea behind the ‘fresh start’—the complete liquidation of all debts—has shifted towards a presumption in favor of repayment.”

Now here’s Konczal’s take on the Mann essay: “I’ve written about how the extremely high interest rates can’t be justified on financial engineering risk-measurement quantifications, and are more likely either a way to force consumers to pay off their loans immediately or soak them for what they are worth. Mann runs a quick number experiment (p. 18): Picture a distressed consumer with $2,000 in a credit card. If the cost of funds is 3%/year, interest is 18% for the first 3 months, 24% next three months, and 30% onward, minimum monthly payment is 2%, 2%+$50, and 2.5%+$50, for those time periods, and the borrower has a $40 fee every other month for whatever reason starting in the seventh month. Typical right? If the consumer pays this off for 2 years, the balance on the credit card is still $1,270, but if you look at the economic total (from the cost of capital) the loan has been paid off with $6 to spare. I replicate this in a google spreadsheet here.

“This is why keeping consumers paying off high fees and high interest for an extra year or two can be so profitable, and why it is worth all the lobbyist money even though the stated goals got lost in the shuffle somewhere. Stringing consumers along for another 2 years+ is a great business improvement, even if it doesn’t change a single other thing under equilibrium. And sure enough, it looks like the two years it has taken to get back to the previous numbers is reflective of this newfound, incredibly profitable, lag.”

In our various explorations concerning how we got in this mess, we’ ve learned that mortgage companies have plenty to answer for, especially why they seem so balky-mule resistant to renegotiating outrageous loan terms when–yet the mortgage industry is rabidly opposed to new legislation that would allow bankruptcy judges to modify loans for primary residences. Now we see that the credit-card industry may also be using the new bankruptcy act to soak its least fiscally able customers.

If Our Fat Lady of the Crisis has finished her aria, when do we get to hear the Phat Lady warming up?

[Editor's Note: Next installment of Mike Hinshaw's coverage will return to Adam Levitin's work, first posted here, expounded upon here and revisited here.]

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It’s true that the bankruptcy reform act of 2005 changed many aspects of the law for those needing protection and also for attorneys who practice bankruptcy law. If you’re considering filing for bankruptcy, it’s important to receive counsel from not only trained bankruptcy attorneys but also from experienced bankruptcy attorneys. Bankruptcy offers many consumers powerful tools for starting over, but it can be a complex process–and timing the submission of your petition can be crucial to your ongoing success, for years to come. We have background information available as well as a simple form that will get you started today. Please notice some terms seem similar on your first reading, so don’t hesitate to click back and forth to get a feel for the terminology and the distinctions between different programs.

Perhaps debt elimination is best for you. Start here.

Maybe debt consolidation is better for you: In that case, start here.

If you already have exhausted the preceding information, you may be ready to consider invoking protection from the bankruptcy code–if so, read here.

If you need immediate help, you can complete a short form here.