Not to beat a dead(beat) horse ourselves, but the “myth of the deadbeat” comes up fairly regularly when researching bankruptcy topics. We most recently this phenomenon a few weeks ago here, where we mentioned that at least one news outlet has quit covering weekly info on personal bankruptcies because, well, it’s just not newsworthy.

Yet, with every new round of data concerning bankruptcy rates, it seems like somebody, somewhere  has to trot out this old, tired pony and flog it around the arena of “shame-on-you.”

The latest, apparently,  is a woman named Mary Hunt, who runs some sort of debt-control Web site called DPL, short for “Debt-Proof Living.” Her regimen looks kinda like Dave Ramsey’s: there’s a “boot camp,” a repayment plan,  and a component for building emergency funds. She offers a free newsletter, and paid members get access at various monthly subscriptions (three months for $10, six for $18, a year for $29, etc.).  Today’s home page offers such tidbits as “Five Quick and Easy Tricks with Bacon”; a method for “Quick Bathroom Cleanup”; and “Mary’s Thought for the Day” for anyone who might “Feel Like a Failure” (if so, keep persevering…like Abraham Lincoln did).

Which, of course, is all good: if she can make a buck by helping folks get debt under control–hey, why not?

‘Moral failing’

But in at least one columnist’s opinion, Hunt went over the top in a recent version of her blog. Writing April 17 at the Minneapolis-St. Paul Star-Tribune, John Ewoldt says: “Everyday Cheapskate” columnist Mary Hunt wrote recently that bankruptcy is a moral failing. Hunt’s opinion isn’t a random swipe — it is based on personal experience after she slowly clawed her way out of a $100,000 credit card debt without declaring bankruptcy. Since then, she has written many books about using credit wisely.

“Hunt’s ‘moral failing’ comment was in response to a personal finance expert who wrote that if you can’t get out of your financial mess in two years, consider filing for personal bankruptcy.

As Ewoldt says, people need to be accountable.  No competent professional will say otherwise. In fact, anyone who downplays the gravity of filing for bankruptcy protection is neither competent nor professional.

But “moral failing” ? That’s simply ridiculous.

Have unscrupulous people ever dodged debt by playing the system? Undoubtedly. But for most–especially nowadays, in this economy, in this crisis–it’s simply a business decision.

Well, don’t buy GM cars, then

Ewoldt asks: “Where’s her column that no one should buy a vehicle from General Motors because it needed a bailout?”

Indeed. In fact, upon reading her background story, one suspects Hunt might be projecting qualities from her past–behavior from years ago–onto jammed-up debtors of today.  According to Hunt, her early years of marriage were characterized by her impulsive, compulsive spending and abuse of every credit card she could lay hands on, mail-order catalogs and even the checkbook–issued from the bank where her husband was a manager. No doubt that caused some friction at home.

Having hit bottom, the pair eventually turned things around. She writes: “It took us 13 years to pay back more than $100,000 in unsecured debt, plus all the penalties and interest. Had I known then what I know now, we could have paid it back in six years or less. But, that’s not important now. What matters is that we did it … we persevered and we are so much better for having gone through it.”

That’s nice. But what really matters is they learned their lesson, and she quit committing credit abuse.

But most folks fighting to keep their homes, fending off harassment, looking for work or dealing with a medical emergency are not guilty of the types of out-of-control acquisition that Hunt concedes afflicted her.

Medical bills, job loss, divorce

According to Ewoldt, “More than 60 percent of people who declare bankruptcy are in over their heads due to medical bills, according to a 2007 study published last year by the American Journal of Medicine. While Hunt and others personalize bankruptcy as people spending willy-nilly or gambling away the farm, about 90 percent of personal bankruptcies result from medical bills, job loss or divorce, said Henry Sommer, the former president of the National Association of Consumer Bankruptcy Attorneys.”

And from the Big Huff herself, at Huffington Post (Apr. 5), we see a reference to a study that’s gaining traction around the Web, in a piece in which Huffington writes: “The consequences of our failed financial system are everywhere you look.”

Huffington, whose larger point is the pressing, critical need for deep, meaningful reform of the financial system, writes: “A study by Elizabeth Warren and Ohio University’s Deborah Thorne, entitled ‘The Vulnerable Middle Class: Bankruptcy and Class Status,’ found that the personal bankruptcy surge is being led by former members of the middle class.

“According to the report, the proportion of bankruptcies filed by those who had attended college went from around 46 percent in 1991 to almost 60 percent in 2007. And, ominously, the data for the report was compiled before the economic crash. ‘I’m almost afraid to look at the data now,’ says Warren.”

Rich and famous

An April 9 article in The Wall Street Journal, headlined “Foreclosures Hit Rich and Famous,” informs us that “Big borrowers are more likely to default than ordinary people, according to data from First American CoreLogic. Its loan database, reflecting more than 80% of the overall home-loan market, includes 1,700 loans with balances of $4 million or more. About 14.8% of those loans were 90 days or more overdue at the end of January, compared with 8.7% for all home loans tracked by First American. Sam Khater, a senior economist at First American, said the bigger borrowers may be more prone [than smaller borrowers] to stop making payments when they have lost all their home equity.”

And, yes, it raises eyebrows to learn that actor Nicholas Cage had “a Tudor mansion in Bel-Air” that “was in foreclosure auction . . . [but] reverted to the lender.”

Even more telling, though, is the case of a formerly high-flying exec at Merrill Lynch, Richard Fuscone, whose 14-acre estate in Westchester  was on the foreclosure block. “Mr. Fuscone, Merrill Lynch’s one-time head of Latin America, put his mansion up for sale in November, asking $13.9 million. But he couldn’t find a buyer.

The court had scheduled a foreclosure auction for Thursday for the 18,471-square-foot mansion—with two swimming pools, two elevators, six fireplaces, 11 bathrooms and a seven-car garage.”

But Fuscone took action and got the foreclosure process stalled. How’d he do that?

He filed for bankruptcy protection:

“The personal bankruptcy filed in U.S. Bankruptcy Court Wednesday temporarily freezes the foreclosure process.

“Reached by phone, Mr. Fuscone declined to comment. Brokers and real estate tracking companies say that his home is one of the most expensive properties to face foreclosure proceedings yet.”

Well, at least he was reached.

Ewoldt says he e-mailed Ms. Hunt but received no reply.

“Hunt,” he writes, “who didn’t reply to an e-mail outlining these concerns, should quit picking on the little guy.”

(Editor’s note: In the next installment, Mike Hinshaw will take a look at life after bankruptcy.)

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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

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