Untitled Document
Rushing to beat an October deadline, when the biggest overhaul of the
bankruptcy law in 25 years goes into effect, rising numbers of Americans seeking
to have their debts erased have filed for protection.
Since President Bush signed the new law in April, bankruptcy filings have jumped,
particularly in the heartland. Filings in the four months through July are up
17 percent this year over last in Cleveland, 14 percent in Milwaukee and 22
percent in northern Iowa, according to court filings, matching similar patterns
in the Midwest and parts of the South and rural West.
Nationwide, bankruptcy filings for April, May and June were up by 12 percent
over the same period last year, according to LexisNexis, the data-collection
service that tracks filings ahead of the quarterly reporting done by the federal
courts. The rise is coming after bankruptcy had leveled off and started a slight
decline last year.
Under the revised law, debtors who earn more than the median income in their
state and who can repay at least $6,000 of their debt over five years will no
longer be able to have their debts wiped out for a fresh start under the more
generous provisions of Chapter 7 of the bankruptcy code. Instead, they will
have to seek protection under Chapter 13, which requires a payback schedule.
In addition, under the new provisions, they will have to enroll in a court-supervised
financial-counseling program.
The rise in filings, which lawyers and bankruptcy experts say is driven in
large part by people who say they fear it will become much more difficult to
escape debt and seek a fresh start under the new law, appears to have caught
some bankers and lawyers by surprise.
When the new bankruptcy bill was passed by Congress in the spring, bankers
predicted it would turn many people away from the protection of the courts by
making it harder to extinguish debt. That may turn out to be the case. But thus
far, it has resulted in a rush to the courts in many places.
In Idaho, the soundless wave of Americans going broke washes up at the clerk's
office in bankruptcy court, with nearly 20 fresh declarations of desperation
every working day.
Bankruptcy filings rose eightfold in the past 30 years, from 200,000 in 1978
to 1.6 million last year. Although filings vary, court records show the pace
for this year, if it holds up, projects to about 1.8 million bankruptcies. The
overwhelming majority are personal, not business.
The Federal Reserve reported household debt hit a record high last year, relative
to disposable income.
"Bankruptcies historically have risen with debt, and a lot more people
are now living near the edge," said Henry Sommer, president of the National
Association of Consumer Bankruptcy Attorneys. "What we're seeing now is
a rush to get in before October. After that, a certain amount of people will
be priced out of bankruptcy."
Courts in Indiana, Nebraska, Ohio, Tennessee, Texas and Wisconsin, among other
places, report that people are hurrying into bankruptcy in numbers rarely seen.
"I'm probably about four times more busy than normal," said Merv Waage,
a bankruptcy lawyer in Denton, Texas.
Idaho, a state with an otherwise prosperous sheen to its surface economy, is
among the per-capita leaders in a category that no state will brag about. Filings
were up 11 percent for July over the same period last year, a record pace for
the year.