Published Sunday, August 21, 2005
Debtors in Rush to Bankruptcy as Change Nears
By TIMOTHY EGAN
New York Times
BOISE, Idaho - Rushing to beat an October deadline when the biggest overhaul of the bankruptcy law in a quarter century goes into effect, rising numbers of Americans have filed for protection in the four months since the law was changed, seeking to have their debts erased.
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, which tracks filings ahead of the quarterly reporting done by the federal courts. The rise is coming after bankruptcy had leveled off and even 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 repayment schedule. In addition, under the new provisions, they will have to enroll in a court-supervised financial counseling program.
The rise, which lawyers and bankruptcy experts say is driven in large part by people who say they fear that it will become much more difficult to escape debt and seek a clean slate under the new law, appears to have caught some bankers and lawyers by surprise.
When the new bankruptcy bill was passed by Congress last spring, bankers predicted it would turn many people away from the protection of the courts by making it harder to extinguish debt. That may still turn out to be the case. But thus far, it has been a rush to the courts in many places.
Here 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.
There is the Moore family of Boise, Kevin and Linda, listing a $10 cat and a $5 toaster among their meager assets against a medical bill of more than $18,000. There is Delores Hawks, going into debt to learn a skill, and never getting out because of endless credit card interest on the self-loan that once looked so manageable.
"Someday, I think we'll eventually get ahead," said Linda Moore, a 41-year-old part-time school bus driver who said she did not know of her husband's medical bills when she married him. "I don't know when that day will be."
Bankruptcy filings rose eightfold over the last 30 years, from 200,000 in 1978 to 1.6 million last year. Although filings vary from month to month, the pace for this year, if it holds up, projects to about 1.8 million bankruptcies. The overwhelming majority of them are personal, not business.
Economists say bankruptcy has become more likely as household debt has continued to rise while the savings rate has fallen precipitously. The Federal Reserve reported that 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 J. 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, Tex. "People are saying, 'Honey, we can't pay our bill. We have no choice. We can't live under the stringent new rules. Let's file now before it's too late.' "
Idaho, a state with an otherwise prosperous sheen to its 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 - on a record pace for the year.
Gordon Barry, a bankruptcy lawyer in Toledo, Ohio, where filings are up 21 percent this year, said: "We've been busier than ever. People are running in, trying to beat the deadline."
The new requirements are an incentive to seek protection now, perhaps the last chance for a relatively hassle-free bankruptcy, some of the newly bankrupt say.
Certainly that was case of Ms. Hawks, who is 56, and lives in Ontario, Ore., just over the Idaho state line. After years of odd jobs, she took out loans on credit cards to go to business school and learn office skills. Once out of school, she found she had a rare nerve disease that she said kept her from holding a job. The debts piled up, even after she got rid of her credit cards.
She paid just enough to satisfy the credit card minimum payment, she said, but never advanced out of the loop of perennial debt on the interest.
"I was paying interest on the interest," Ms. Hawks said, "it was $5,000, and I never got ahead of it. Month after month after month. Finally, I just got tired of it. I said, 'I've had enough.' "
She had heard enough about the changes in the bankruptcy law to feel that it was important to file this summer rather than wait until all provisions of the new law took effect in October, she said. "I had to do something," said Ms. Hawks, who now lives on $656 a month in Social Security disability. "I decided to do it now rather than later."
Families with children are three times more likely to file as those without, according to studies done by Elizabeth Warren of Harvard Law School and others, and more than 80 percent of them cite job loss, medical problems or family breakup as the reason.
Ms. Moore, an Air Force veteran of the Persian Gulf war who married a carpenter and inherited his outstanding medical bills, said those old debts forced the couple into bankruptcy. Both Ms. Moore and her husband had been divorced before.
But she admits that they brought on some of the problem themselves.
"My husband, he's the kind of guy who when he gets a bill that he can't pay, he just puts it aside," Ms. Moore said.
The monthly math of the Moore family budget leaves little room for unplanned events. Mr. Moore makes about $1,200 a month as a carpenter. Ms. Moore, a mother of three children, drives a school bus part time, and makes $11 an hour. She also receives $300 a month in alimony. Their rent is $700 a month. Their food costs are $400 a month. Their cars, insurance and upkeep are $200 more.
Most months, they barely break even, she said. But what pushed them into bankruptcy were bills from the past, which kept growing with interest - a mountain that finally turned into an avalanche. They detailed the bills in their court filings.
The biggest was an $18,000 medical bill, for Mr. Moore, from a severe knee injury. He also owed $2,469 to a hospital where he went for care during a bout of depression. There was a $205 bill to DirecTV, and a $600 bill to Money Tree and a $615 debt to Capitol One - both lending services. And he owed child support, for $542.
Ms. Moore said she did not know about most of her new husband's debts until she started getting her wages garnished from her bus-driving job. She has health insurance from her Air Force days, but it has not been enough to keep them out of bankruptcy.
"My husband's old medical bills - that's what killed us," she said. Bankruptcy was a chance to start clean, she said. Bankers say the surge in filings is driven in part by misinformation about how the new law will work. They say it will force only the small percentage of people who abuse the system into regular payment schedules, while keeping an open door of debt forgiveness to the vast majority of bankruptcy filers, who are individuals rather than businesses.
"I would hope that consumers are not getting the rush-rush because they're afraid they won't have the same protection in a few months," said Wayne Abernathy, an executive at the American Bankers Association, which lobbied heavily for the new law.
Consumer groups say the law will only make matters worse for the large number of families who are not abusing the system. They say families will be stuck in "debtor's prison without walls," as the Consumer Federation of America, which fought the new bill, calls it.
Many economists and legal experts say that once all provisions of the law take effect in October, bankruptcies should fall again. And some experts say people will be caught in an endless cycle of debt repayment.
Ms. Hawks, who said that she declared Chapter 7 bankruptcy last month to get out of the endless interest payments on credit cards she had long given up, is puzzled by the financial industry's continued interest in her.
"Couple of times a week, I get a phone call or something in the mail trying to get me to accept a new credit card," she said. "I don't get it - because I'm broke."