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October filings total 108,595 up nearly 34 percent from '07. Credit crunch to blame
By Tara Siegel Bernard
and Jenny Anderson
New York Times
Published on Sunday, Nov 16, 2008
The economy's deep troubles are pushing a growing number of already struggling consumers into bankruptcy, often with far more debt than those who filed in previous downturns.
Plummeting home values, dwindling incomes and the near disappearance of credit have been a potent mixture.
While all the usual reasons that distressed borrowers seek bankruptcy — job loss, medical bills, divorce — play significant roles, new economic forces are changing the calculus of who can ride out the tough times and who cannot.
Personal bankruptcy filings jumped nearly 8 percent in October from September, after marching steadily upward for the last two years, said Mike Bickford, president of Automated Access to Court Electronic Records, a bankruptcy data and management company.
Filings totaled 108,595, surpassing 100,000 for the first time since a law that made it more difficult — and often twice as expensive — to file for bankruptcy took effect in 2005. That translated to an average of 4,936 bankruptcies filed each business day
last month, up nearly 34 percent from October 2007.
Robert M. Lawless, a professor at the University of Illinois College of Law, pointed to the tightening of credit by banks as a significant factor in the increase in October.
As banks have pulled back on lending, he said, consumers have been finding it more difficult, and in many cases impossible, to use credit cards, refinance their home mortgages or fall back on their home equity to get them through a rough period.
''A credit crunch can drive people into bankruptcy today rather than later as sources of lending dry up,'' Lawless said. ''With the consumer credit tightening and the economy in a nosedive, this pop could just be the beginning of a long-term rise in the bankruptcy filing rate to levels that are even higher than we had before the 2005 bankruptcy law.''
Not only are filings up, but also recent filers have had much more credit-card debt, often run up in an attempt to keep current on a mortgage that now exceeds the value of their home, bankruptcy lawyers said in interviews.
Incomes remain static
A recent study found that the typical family who filed for bankruptcy in 2007 was carrying about 21 percent more in secured debts, like mortgages and car loans, and about 44 percent more in unsecured debts, like credit cards and medical and utility bills, than filers in 2001.
Their incomes, meanwhile, remained static over those six years, according to the study, which used data from the 2007 Consumer Bankruptcy Project, a joint effort of law professors, sociologists and physicians. Researchers surveyed 2,500 households nationwide that filed for bankruptcy in February and March 2007.
''Earlier downturns followed strong booms, so families went into recessions with higher incomes and lower debt loads,'' said Elizabeth Warren, a professor at Harvard Law School and, along with Lawless, part of the Bankruptcy Project team. ''But the fundamentals are off for families even before we hit the recession this time, so bankruptcy filings are likely to rise faster.''
Not surprisingly, filings are increasing most rapidly in states where real-estate values skyrocketed and then crashed, including Nevada, California and Florida. In Nevada, bankruptcy filings in October were up 70 percent compared with last year. In California, bankruptcies jumped 80 percent in the same period; Florida's filings rose 62 percent.
Fight to keep home
In states mired in the housing crash, some people are trying to rescue their homes through bankruptcy proceedings, but many are just as relieved to walk away, shedding layers of debt that otherwise would have taken decades to pay off.
Tony and Carrie Forsyth, both 30, chose not to walk away from their house in Florida.
They said they thought their situation would improve in 2006, when Tony Forsyth accepted a promotion from his employer, a Michigan food distributor, that required them to move to Florida. But they could not sell their home in Ypsilanti, Mich., so they decided to rent it out.
In June 2006, the couple headed south and bought a house for $220,000 in Tamarac, Fla., with no money down. Five months later, their tenants in Michigan stopped paying, and the family had to carry two mortgages, just as the Michigan loan reset to a higher interest rate. They lost the Michigan home to foreclosure in February 2007.
By that time, however, the Forsyths, who have two young daughters, were using credit cards to pay for food, utilities and clothes.
After accumulating about $20,000 in debt, they said, they realized that bankruptcy was the only way they could remain in their Florida home, whose value, meanwhile, had plunged 25 percent. They filed for Chapter 13 bankruptcy protection this year, which permitted them to keep the house, and they agreed to repay a portion of their debts over the next three years.
A Chapter 7 bankruptcy, by contrast, provides filers with what is known as a ''fresh start'' because debts are forgiven. Filers who are deemed able to repay a portion of their debts must file for Chapter 13 bankruptcy.
Tony Forsyth said declaring bankruptcy was difficult. ''Because of our Christian background, it didn't feel right. But there was no other way for us to live and support our family unless we went that route.''
Carrie Forsyth added: ''We are just rolling with life. You have to eat. You have to have diapers.''
The economy's deep troubles are pushing a growing number of already struggling consumers into bankruptcy, often with far more debt than those who filed in previous downturns.
Get the full article here.
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