2005 reform law fails to hold down bankruptcies in face of recession
By Susan Ladika
Call it déjà vu. Despite reforms intended to make it harder to file for bankruptcy, consumer filings continue to march steadily higher toward the rate they were before legislation was overhauled in 2005.
For the first nine months of the year, individual bankruptcy filings totaled 1.07 million, according to U.S. Bankruptcy Court statistics compiled by Automated Access to Court Electronic Records.
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| BANKRUPTCIES REMAIN ON THE RISE |
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| A 2005 federal law that made bankruptcy more difficult slowed filings only temporarily. This map shows a bankruptcy time line -- the 2005 tsunami of filings just before the law took effect, the falloff right after and the resurgence since. |
That puts them on pace to reach more than 1.4 million for the year, predicts Robert Lawless, a professor of law at the University of Illinois College of Law in Urbana-Champaign. He sees it as a "return to the 'natural level' of bankruptcy filing rates in this country."
The current economic climate doesn't help. While the unemployment rate climbed to 9.8 percent in September, according to the U.S. Bureau of Labor Statistics, consumer credit has tightened. It's not unusual for consumers to see their credit card limits cut and fewer new credit card offers turning up in their mailboxes.
"When people can no longer borrow on their credit cards to stave of the day of reckoning, they end up in bankruptcy court," Lawless says.
Between July and September, more than 5,900 bankruptcy petitions were filed each day in courts across the nation, AACER statistics show. They peaked at more than 6,000 per day in May, and have edged down only slightly since that time.
'Nowhere to turn'
Maureen Thompson, legislative director of the Washington, D.C.-based National Association of Consumer Bankruptcy Attorneys, says until factors such as high unemployment rates and burdensome medical bills are addressed, "you're not going to see any real drop in the number of people filing for bankruptcy. People carry a lot of debt, and they have nowhere to turn right now."
When the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 was approved, the notion was "there was widespread gaming of the system," Thompson says. But she argues that wasn't the case.
"In our experience people try to pay their bills just as long as they can," but when they face foreclosure, have their wages garnished or have liens placed on their bank accounts, then they'll turn to bankruptcy courts, she says.
In anticipation of the 2005 law, which required higher filing fees, a means test for eligibility, counseling programs, and an eight-year moratorium before filing again, consumers flocked to file before the law took effect, pushing bankruptcy filings to about 2 million in 2005.(See interactive bankruptcy time line to watch filings unfold over time, state by state.)
The numbers dropped afterward, but have climed ever since.
| Our big fear is it potentially can get worse before it gets better. |
| -- Maureen Thompson National Association of Consumer Bankruptcy Attorneys |
Since then, the numbers have soared back up again, and figures for the first nine months of 2009 are nearly one-third higher than they were for the same period in 2008, according to AACER.
As might be expected, California and Florida were at the head of the pack in total number of bankruptcy filings. In California, more than 150,000 consumers filed for bankruptcy during the first nine months of the year, and in Florida that number topped 70,000. Filings surpassed 50,000 in Georgia, Illinois, Michigan and Ohio.
On a per-capita basis, Nevada stayed in the lead, followed by Tennessee and Georgia. Nevada had 11.24 bankruptcy filings for every 1,000 people, far outpacing any other state. Nevada also saw the greatest increase in per-capital bankruptcy filings from 2008 to 2009.
The American Bankruptcy Institute predicts that consumer filings will total 1.4 million this year, while Lawless estimates they'll reach 1.45 million.
No quick improvement seen
Thompson doesn't expect things to improve any time soon, particularly as long as unemployment remains high. Many expect the unemployment rate to hit 10 percent by year's end. "Unemployment is a driving force," and like bankruptcy is a lagging economic indicator.
At the same time, many option adjustable rate-mortgages are scheduled to reset, which could force more homeowners into foreclosure, Thompson says. "Our big fear is it potentially can get worse before it gets better."
While Lawless doesn't anticipate any major changes in the near term, "with consumer credit contracting, we may see a decrease in bankruptcy filing rates maybe three to five years out, but if there's a decline it won't be dramatic."
