NYT: Downturn Pushes More Toward Bankruptcy



New York Times
April 4, 2009

Downturn Pushes More Toward Bankruptcy

The ailing economy continues to pull more Americans into bankruptcy
court, where the number of troubled consumers filing for protection
soared in March to its highest level since October 2005, when a new
law made it more arduous and expensive to file.

And as job losses continue to climb, they may well drag bankruptcy
filings along with them.

An average of 5,945 bankruptcy petitions were filed each day in March,
up 9 percent from February and up 38 percent compared with a year
earlier, according to Mike Bickford, president of Automated Access to
Court Electronic Records, a bankruptcy data and management company. In
all, 130,793 people filed for bankruptcy in March.

The weak economy and its repercussions — rising unemployment, lower
pay, fewer people with health insurance, and the mortgage and
foreclosure crises — are all playing a role in the big increase in
bankruptcies. And some of the most common factors that tend to lead to
bankruptcy filings — divorce and disruptive health problems — have not
gone away.

But the biggest factor in the current spate of filings may be the
tightening of credit.

"We have a lot of people out of work, but that alone is not driving
the spike in bankruptcy filings," said Robert M. Lawless, a professor
at the University of Illinois College of Law. "Along with job loss is
the tightening of consumer credit. Compared to 18 months ago, the
American consumer does not have the same ability to borrow in an
attempt to stave off the day of reckoning. With no income and no
credit, it is not surprising that the middle class is looking to the
bankruptcy courts for relief."

Professor Lawless said he expected total bankruptcy filings to reach
1.45 million to 1.5 million by the end of the year, compared with
nearly 1.1 million filings in 2008, an increase of 31 percent to 36
percent. It also means that filings are fast approaching the average
number of annual filings of about 1.4 million before the new
bankruptcy law took effect in October 2005.

"It shows you that a lot more people are hurting," Mr. Bickford said.
"Even with the more restrictive law in place, the filings are back up
to the prelaw level."

The law, the Bankruptcy Abuse Prevention and Consumer Protection Act,
made it more difficult for consumers to erase their debts through
Chapter 7 bankruptcies. Those who earn more than their state's median
income are now required to first pass a means test — based on income,
living expenses and other factors. If they are deemed able to repay
some debts, they are then forced to pursue a Chapter 13 bankruptcy,
which sets up a three- or five-year repayment plan and makes it more
difficult to get a fresh start.

"In a nutshell, bankruptcies happen because financial distress
happens," said Jack Williams, resident scholar at the American
Bankruptcy Institute and a bankruptcy professor at the Georgia State
University College of Law. "It is hubris to think that we can manage
such a complex system by inserting a means test here, a credit
counseling requirement there."

Keith and Leola Gladney of St. Charles, Mo., filed for Chapter 13
bankruptcy last summer. Their problems began to unfold in September
2007, when Mrs. Gladney, who was pregnant, was put on bed rest and
could no longer work as a marketing assistant. They lost her income,
though she did receive short-term disability payments. In January
2008, Mr. Gladney, 38, lost his job as a manager of an auto parts
store. Within months, the couple had fallen behind on the mortgage
payments on their home, which they bought for $130,000 in 2004.

They lost the house around the time their son was born in March 2008,
and the couple had to move into a hotel with their newborn. Though
they eventually found an apartment to rent, the Gladneys decided to
file for bankruptcy. Adding to their troubles, Mrs. Gladney, 37, found
out last November that she did not have a job to return to.

"It is really stressful for me because I thought I would find another
job," she said.

Mr. Gladney said he was hopeful that he was close to receiving a job
offer on one of the 30 or so résumés he sends out daily. "We are
trying to keep our heads up and keep a positive attitude and hope
things will get better," he said. "We go to church every Sunday. We
haven't changed our routine."

If history is any guide, the number of bankruptcy filings will
increase through this year, but will not jump as much as they did from
February to March because that tends to be a popular time for filing,
Professor Lawless said. But if legislation is passed that would allow
bankruptcy judges to modify some primary mortgages, filings could rise

The House has approved a version of that so-called cramdown
legislation, but the Senate did not have enough votes to overcome a
filibuster by Republicans, who want the modifications to apply to a
much smaller pool of loans. The Senate Democrats are working on a
compromise, and say they hope they can bring the bill to the floor
after Congress returns from recess on April 20.

The power to modify home mortgages would probably lead many more
people to pursue bankruptcy to save their homes. If the legislation
were to pass, Mr. Lawless said, 1.6 million would be a conservative
estimate of the number of bankruptcy filings this year.

"We have to remember that prebankruptcy negotiations take place in the
shadow of the bankruptcy law," he added. "We would expect that banks
would be more likely to come to the negotiation table."

Regardless of what happens, the number of consumers filing for
bankruptcy is expected to continue to climb even after the economy
begins to recover.

"What is sobering about these numbers is that bankruptcy is generally
a lagging economic indicator," Professor Williams said. "So even as
the economy starts to turn around down the road, we will still
continue to see bankruptcy filings increase even past that turning
point, and that trend will continue anywhere from three to five



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