“Bankruptcy is often an indicator of what is going on in the real economy,” said Maureen Thompson, legislative director of the National Association of Consumer Bankruptcy Attorneys.
“People are getting laid off and losing their health insurance. Others who are carrying big debts can’t get home equity loans or refinance their mortgages. It has now all come together. People on Main Street are really hurting, and that pain is not going away, despite current economic indicators” that suggest the recession has ended, Ms. Thompson said.
Consumer bankruptcy filings have increased during each of the past three years. In 2009, they reached their highest level since 2005, when more than 2 million people filed for bankruptcy. The Bankruptcy Abuse Prevention and Consumer Protection Act became effective in October 2005.
Fewer than 600,000 people filed for bankruptcy in 2006, in part because the 2005 law tightened the criteria for filing and because many beat the law’s October implementation. Bankruptcies topped 800,000 in 2007 and surpassed the 1 million threshold in 2008.
Chapter 7 of the bankruptcy code provides for “liquidation,” in which the debtor’s property is sold and the proceeds are distributed to creditors. The balance of the unsecured debt is discharged to give honest debtors a fresh start.
The 2005 law made it more difficult for households to file under Chapter 7 and to eliminate their debts, especially if their income exceeded the median level in their state. If a “means test” indicates that a debtor can repay a portion of the restructured debts, Chapter 7 is normally not an option.
The goal of the 2005 law was to steer more consumers to Chapter 13, which requires repayment of all or part of the debts to unsecured creditors. In return, the bankruptcy filers are able to retain some secured assets, such as cars and primary residences, that otherwise would be liquidated. The opportunity to save a home from foreclosure is a major benefit of Chapter 13, although filers are required to make timely mortgage payments that come due under their Chapter 13 payment plan.
To file under Chapter 13, a person must have regular income, Mr. Lawless said. But the explosion of long-term unemployment has meant that many filing for bankruptcy today do not meet that standard. Nearly 40 percent, a record-level proportion, of the nation’s 15.4 million unemployed people have been jobless for 27 weeks or longer.
In the past, 70 percent of consumers filed for bankruptcy under Chapter 7 while 30 percent used Chapter 13, said Mr. Gerdano, of the ABI. Shortly after the 2005 law went into effect, Chapter 13 filers increased to about 40 percent, he said. But now the ratio is back to 70 percent to 30 percent.
“The laws of economic gravity are a lot stronger than the laws of Congress,” Mr. Gerdano said.
“If you cannot outlaw unemployment or uninsured medical expenses or divorce, then you are not going to do anything about rising bankruptcies,” said Ms. Thompson, the representative of bankruptcy lawyers, who said her organization never believed the ratio of Chapter 7/Chapter 13 filings would be changed over the long term.
“The vast majority of people file for bankruptcy as a last resort,” she said. “They try to pay their debts, including the 30 percent credit card interest rates, until they can pay no more.”
Ms. Resop is a bankruptcy lawyer specializing in Chapter 7 cases in Madison and Janesville, Wis., where a General Motors Co. plant shut down a year ago. Her business is up 40 percent to 50 percent over the past six months.
“I see a lot more middle-aged people and households that own real estate filing for bankruptcy today,” Ms. Resop said. “Many of these people, who are in their 50s and 60s, got second and third mortgages to keep up with other bills over the years.” Now, they are being crushed by the collapse of housing equity.
They are filing under Chapter 7, eliminating their debt and surrendering their homes, Ms. Resop said, but they will never replace their relatively high factory incomes.