"The Bankruptcy Boom is Back"

http://articles.moneycentral.msn.com/Banking/BankruptcyGuide/TheBankruptcyBoomIsBack.aspx

The bankruptcy boom is back
By Liz Pulliam Weston

Consumer bankruptcy filings continue to increase, with Chapter 7 liquidation filings rising 54% in the second quarter compared to the previous three months.

Consumer bankruptcies had plunged following the passage of a tough new bankruptcy law last year. By the second quarter, however, the pace of filings had picked up to 2,200 to 2,300 new filings per business day, more than four times the level in November 2005 after the bankruptcy law went into effect, according to Chris Lundquist, founder of Lundquist Consulting, which tracks bankruptcy trends.

Individuals filed 85,449 Chapter 7 cases in the three months ended June 30 and 142,815 bankruptcy cases overall, a 39% increase from the previous quarter. (Most consumer bankruptcies are either Chapter 7s, which allow people to erase most of their unsecured debts, or Chapter 13s, which require that at least some of the debt be repaid over time.)

Currently, courts are reporting an average of 2,300 to 2,400 daily filings, Lundquist said. That's still significantly less than the record filing levels that drove passage of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005. But it may indicate that the bankruptcy juggernaut was just stalled, not cured, by the new law.

Flood hits credit counseling agencies
Meanwhile, the leading credit-counseling organization says bankruptcy reform is putting unprecedented strain on counselors' finances.

Bankruptcy filers are required to undergo credit counseling before they can proceed with their cases, and agencies affiliated with the National Foundation for Credit Counseling say such sessions now comprise one-third to one-half of their caseload, according to marketing director Bob Ensinger.

But many debtors arrive at the counselors in such sorry shape that they can't pay the nominal fee the nonprofit agencies impose. "We're running (these sessions) at a loss," Ensinger said.

Each pre-bankruptcy counseling session costs the agencies an average $50.96, Ensinger said, but the average amount collected is just $37.71. Losing $13.25 on each session is bad enough, but the agencies complain that a larger than expected number of applicants is forcing them to redirect resources that might otherwise be used to help consumers who still have a fighting chance to pay their debts.

Surely, this is not what Congress had in mind.

Lawmakers wanted to stem a rising tide of filings, so they passed a law that can divert higher income filers into Chapter 13 repayment plans, rather than allowing them to file for a Chapter 7 liquidation of their debts. Critics said the bill unfairly punished consumers while putting few restrictions on irresponsible lenders.

Fallout from reform
The reform law's unexpected -- and unpleasant -- consequences started before it even went into effect.

Consumers rushing to beat the Oct. 17 implementation flooded the court system, leading to long lines outside courthouses and unprecedented numbers of filings. More than 2 million consumer cases were filed in 2005, including 619,588 in October alone.

Consumers usually don't file bankruptcy on the spur of the moment. Typically, they struggle for years with their finances before giving in, Lundquist said. His research indicates that the "extra" filings last year represented many people who otherwise would not have filed for another 12 to 24 months.

All told, one in every 60 households filed a consumer bankruptcy in 2005, according to the American Bankruptcy Institute. In 2004, one of every 79 households filed; by the first quarter of this year, the rate had plunged to 1 in 261.

Lenders knew many consumers would try to beat the deadline, but the actual size of the pre-implementation surge caught the industry by surprise. Many credit card issuers, in particular, wound up facing much larger losses than they expected, as I wrote in "Bankruptcy law backfires on credit card issuers."

The reduction in filings after the law took effect -- first-quarter filings were down 73% from the same period a year ago, and second-quarter cases were 69% lower -- has been good news for those lenders. One measure of the industry's pain, Fitch Ratings' credit card index for charge-offs -- debt unpaid after six months -- plunged from a peak of 7.52% in November to 3.29% in February 2006.

Ominous indicators
If charge-offs and other delinquencies start to tick up, however, we could see the pace of bankruptcy filings quickly follow.

Credit counselors are already reporting an increase in the number of debtors seeking help because of high gas prices and adjustable-rate mortgages that have reset at higher rates. Those debtors may well enter the bankruptcy pipeline in the next year or so.

Doing so will cost them more than in the days before bankruptcy reform. The average cost for a Chapter 7 filing used to be around $1,000, said researcher David Skeel of the American Bankruptcy Institute. Now the going rate is about twice that. Chapter 13 filings tend to cost about 50% more.

"It is more costly to file and more of a hassle," Skeel said. "One of the great ironies (of bankruptcy) is that you can be too poor to file … and there could be more people" in that predicament.

Lundquist thinks filings could eventually return to 90% of the old rate, although the pace will depend on the long-term effects of the new law.

"Are more people discouraged from filing bankruptcy? Will more file Chapter 13s instead of Chapter 7s? Will more people chose alternatives to bankruptcy?" Lundquist asked. "It's just too early to know."

Same factors propelling bankruptcies
The factors that helped feed the bankruptcy boom of the past decade are certainly still in place. Those include:

An enormous expansion of credit by the lending industry, including to customers with shaky repayment histories and questionable ability to repay. The amount of outstanding credit card debt was more than quadrupled since 1990, to $696.7 billion, according to CardWeb.com.

A large segment of the public that's financially illiterate. Only one-third of adults in a recent poll had a good understanding of basic economic and personal-finance concepts, according to a Harris Interactive study prepared for the National Council on Economic Education.

Interest rates with no caps. Many credit cards now come with penalty rates above 30% that can be triggered by a single late payment. Overextended consumers facing those kinds of finance charges can quickly find themselves unable to keep up with payments.

A growing number of people who are uninsured, or underinsured, against medical bills. The Census Bureau counts 45 million uninsured, and a recent Commonwealth Fund study found 41% of moderate- to middle-income adults did not have health insurance for at least part of 2005, up from 28% in 2001. A Harvard University study found medical bills were a factor in half of consumer bankruptcies.

Given these trends -- and Congress' unwillingness to tackle any of them -- any lull in filings may well be as fleeting as a teaser rate.

Intersting article......

The author mentioned high energy costs and ARMs, but it's interesting that she omitted the fact that CC companies doubled their minimums once the new laws went into place.

At least she did mention the usurious interest rates on credit cards when there are late payments; I'm waiting for someone to put it all together in an article and detail how this triple whammy pushes people over the edge even before doubling minimum payments 1) late payment resulting in a higher interest rate 2) lowering limit with no notice thus giving an instant overlimit fee and higher rate, and then 3) other cards on which you are not late going high interest with universal default.

Is there no major financial advice columnist willing to go head to head with the bankers??? My daughter discovered that her one credit card changed the time of "credited that day" on line payment to early afternoon instead of midnight! Fortunately, she was making the payment in the morning!

Also, I wonder if there will ever be true banking reform via Congress considering all our representatives have to be independently wealthy to make a run for office ...and then need the contributions from the bankers to fund re-election. I would love to see Banking reform added to the "platforms" of our major parties....HA HA! Dream on, right...

Excellent article, all that work on reform for what. Look what it did for the situation; nothing. Although it does create generate fees and costs to all involved.

http://articles.moneycentral.msn.com/Banking/BankruptcyGuide/TheBankruptcyBoomIsBack.aspx


Good article, Sammy - thanks for sharing!

good read. From what I heard, this is why they are going to start auditing bankruptcies starting in October. To find out why things aren't working the way they thought they would.

With gas prices rising and health care costs out of control do they really need to audit to see why bk's are rising. I mean it does not take a rocket scientist to figure it out.

These are the "rocket scientists" who tols us that "restructuring" the law would make the BK load much smaller. It is doing what i said it would, expanding the bearaucracy to meet the new load. Kudos Mr. Bush! Kudos! Smaller Government?! The Republican party deserves to get trounced for going back on their "contract with America".

These are the "rocket scientists" who tols us that "restructuring" the law would make the BK load much smaller. It is doing what i said it would, expanding the bearaucracy to meet the new load. Kudos Mr. Bush! Kudos! Smaller Government?! The Republican party deserves to get trounced for going back on their "contract with America".


I strongly agree, but I'm still more afraid of the Democratic alternative. :unsure:

When I go into the voting booth this November I will have to decide on the party of BAPCPA,MBNA,CITI,CHASE or the party of Michael Moore. I think we're f..d!:dry: I also think I will start going to church again:angel: I need to pray more.

Fool,

I am scared of all of them. They have completely lost touch with the American people. That said, I am voting democrat for the first time in my life. Yikes!!!!! I am not voting democrat, but rather casting it as an anti republican vote. Really, what choice is there???

I think they are all crooks, both the democrats and the republicans are basically goverened by lobbiest money and not necessarily in the best interest of the nation. I for the most part have voted Republican, though I have voted for Democrats from time to time. There are a few congress people in my state I have written and always gotten responses that proved they were out of tune with society.

I think they are all crooks, both the democrats and the republicans are basically goverened by lobbiest money and not necessarily in the best interest of the nation. I for the most part have voted Republican, though I have voted for Democrats from time to time. There are a few congress people in my state I have written and always gotten responses that proved they were out of tune with society.


What bothers me the most about BAPCPA and the politicians is how easy they re wrote the laws and how it passed both houses and the president signed it. They don't work that hard on the medical coverage crisis, social security & medicare reform, infrastructure problems, federal deficit, but BAPCPA was probably their only accomplishment in recent years and it's only because it was bought and paid for by the big banks. I just wish the same determination went into reforming real problems. They will address the above problems and then the debates will fade out, but BAPCPA was such a high priority you would think they were working on curing cancer the way they were so passionate about this. I wouldn't be so upset with this law if they got other needed reforms passed too.

What bothers me the most about BAPCPA and the politicians is how easy they re wrote the laws and how it passed both houses and the president signed it. They don't work that hard on the medical coverage crisis, social security & medicare reform, infrastructure problems, federal deficit, but BAPCPA was probably their only accomplishment in recent years and it's only because it was bought and paid for by the big banks. I just wish the same determination went into reforming real problems. They will address the above problems and then the debates will fade out, but BAPCPA was such a high priority you would think they were working on curing cancer the way they were so passionate about this. I wouldn't be so upset with this law if they got other needed reforms passed too.

When you think about it, BAPCPA was easy to pass because all the money interests were on the same side lobbying hard and throwing many millions into the pot to make the law much tougher on consumers who had no $$ to fight back. Pretty obvious what really matters to our congressional representation regardless of party these days - $$$$ for their campaigns, not the best interests of people they represent. The other problems you mentioned (healthcare, social security, federal deficit, etc) have monied interests lobbying for both sides of the proposed legislation - makes it much harder in today's Congress because no matter what they pass, they'll anger at least one heavy $$ contributor to congressional campaigns. Quite a dilemma, so nothing happens. The founding fathers would be shocked to see how tainted our political system has become.

We get what we elect, so when are we the voters going to realize there's power in numbers to counteract $$ power held by a privileged few? Until we refuse to vote for anyone already in office who has shown through their voting record that they don't represent our interests, I don't expect anything will change. And the banks and corporations will continue to contribute to get whatever is best for them and their stockholders passed, not what's best for the country and all of its people.

What bothers me the most about BAPCPA and the politicians is how easy they re wrote the laws and how it passed both houses and the president signed it. They don't work that hard on the medical coverage crisis, social security & medicare reform, infrastructure problems, federal deficit, but BAPCPA was probably their only accomplishment in recent years and it's only because it was bought and paid for by the big banks. I just wish the same determination went into reforming real problems. They will address the above problems and then the debates will fade out, but BAPCPA was such a high priority you would think they were working on curing cancer the way they were so passionate about this. I wouldn't be so upset with this law if they got other needed reforms passed too.

BK had (and still has) some issues, but it needed to be addressed from many angles. I blame myself for my debt; however, credit companies need to be made responsible for their predatory tactics and outrageous late fee structures.

Don't forget to mention "real estate crash" to come that I've been reading about for months now. This should be shocking as well: The volume of medical records being processed overseas (cheaper labor) by people who learn to speak English in school. If you can't understand them when you call Dell, for example, what do you think they are doing to the documentation of your last doctor visit? This drove me to BK court in the first place. Now my current company has to compete with the old company and all their cheaper labor. My wages have been cut three times since January just to stay competitive. It would be better for me to simply move over there! Add that to gas, CC companies, mortgages ARMS! Greed greed greed. The best thing I ever did besides realizing there was a God of some sort out there, was FILING BANKRUPTCY in October 2005. How sad......