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.

*************************************************************************

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

Writing March 11 in the Orlando Sentinel, staff writer Richard Burnett cites several sources indicating that tax season has also become bankruptcy season: Traditionally, tax refunds have gotten socked away in savings or gone to pay worrisome bills, perhaps a down payment on a new car or equipment–or even an indulgence such as a vacation or luxury item.

But this year, more people are using their refunds to pay for filing bankruptcy.

“Hit by job losses, health problems or heavy mortgage debt,” writes Burnett, “some cash-strapped consumers are counting on refunds to handle the legal costs of filing personal bankruptcy.

‘I’m not kidding when I say nearly every client I have is telling me they are going to use their tax refund to pay for their bankruptcy case,’ said Walter Benenati, an Orlando consumer bankruptcy lawyer. ‘And I don’t see that trend changing any time soon.’ ”

Burnett cites the case of a man who works at Walt Disney World “who was making decent money” but got his hours reduced when the financial crisis hit–then got a double punch when “his bills skyrocketed.” The man said his refund was not enough to cover the entire cost of the filing, but that he had filed early, on purpose, to have the refund ready to use. ‘It wasn’t that much, but it did help some,’ he said.”

Burnett also quotes local bankruptcy lawyer Anne-Marie Bowen, who doesn’t think it’s good money management but recognizes that it’s “tough for people in a financial jam to resist tapping their tax refund because the typical $2,000 to $3,000 refund can cover bankruptcy costs.”

Another bankruptcy attorney Burnett quotes, Jonathan Alper of Lake Mary, indicates that this wave of filings comprises the full spectrum:

“Personal bankruptcies during the recession have run the gamut — rich to poor, executives to construction workers, said . . . Alper . . . .” who went on to debunk the idea that current bankruptcies are catching up with flippers and liars who got caught gaming the system. ‘This is like the typhoon that is sinking all ships,’ he said. ‘We have a lot of people who really did things the right way. They didn’t do anything speculative or imprudent. In many cases, we’re working with small-business owners who had clients who fell on hard times and just couldn’t pay them.’ ”

Two days earlier, in the Detroit News, Jaclyn Trop filed a report with this lead:

“Declaring personal bankruptcy may not carry the same stigma it once did.

“As unemployment rates skyrocket and home values plummet, new attitudes toward debt may explain why more people are letting their homes and other assets go rather than working out a debt repayment plan in the nation’s bankruptcy courts.

‘It’s not being looked at as a personal failure but a product of the times,’ said credit counselor Rachel Hood of Consumer Credit Management in Farmington Hills.”

Trop finds a regional pattern that is emerging nationwide: As the economy worsens, Chapter 7 filings are increasing, not only relative to Chapter 13 filings but also in overall numbers. That’s significant for a couple of reasons. First, the so-called reform of the bankruptcy laws in 2005–pushed hard by the credit card lobby–made it tougher to file Chapter 7. The credit card companies labeled it an essential change to discourage abusers from walking away from credit card debt. Second, the economy has soured so badly that even with stiffer requirements more people are meeting the means test [see more on qualifying for Chapter 7 ].

“Chapter 7 filings for individuals, which liquidate a debtor’s property and convert it to cash for creditors,” writes Trop, “increased by more than 25 percent in the first three quarters of 2008 compared with the entire 12?months of 2007.

“According to data from the Eastern District of Michigan bankruptcy court, which serves the Detroit, Flint and Bay City metro areas, Chapter 7 filings rose from 23,734 for all of 2007 up to 29,933 for the first nine months of 2008 (detailed data is available only for the first three quarters of 2008).

“But while Chapter 7 filings have been increasing, Chapter 13 filings, which allow debtors to keep their assets through a repayment plan, have shrunk from 42 percent of all personal bankruptcies in 2006 to 25 percent for the first three quarters of 2008.

“The uptick in Chapter 7 filings comes despite a change in the federal bankruptcy code in 2005 that makes it harder to qualify for liquidation-style bankruptcy, and encourages Chapter 13 filings, which forgive less debt and require payment plans in most cases.”

Trop summarizes that because “more people are eligible to file Chapter 7 [it] means that incomes are plummeting, too, as work hours are reduced and jobs are cut.”

Trop also quotes the credit counselor again: ” ‘It’s harder to file for Chapter 7, but more people are qualifying,’ Hood said.”

And as far as bankruptcy in general goes? Hood also told Trop that people “are not quite as upset lately. It’s becoming more and more common. People are resigned to that being a fact of life at this point.”