- The Washington Times - Saturday, August 25, 2001

Bankruptcy filings soared to a record high in the second quarter as the economy slowed, the government reported yesterday. The 24.5 percent increase from a year ago brought total personal and business filings to 400,394.
The previous high was in the second quarter of 1998, when filings hit 373,460, according to the Administrative Office of the U.S. Courts.
"The numbers are really quite amazing," said Samuel Gerdano, executive director of the American Bankruptcy Institute in Alexandria. "But household consumer debt grew throughout the 1990s at a rapid pace; there's a negative savings rate, and economists used to not concern themselves so much with the run-up of household debt because of the so-called wealth effect. But, of course, that's no longer operative."
The wealth effect Mr. Gerdano was referring to is the money people made in the booming stock market. But the market's fall has left many Americans much poorer than they were a year ago.
Heavy job loss in the first half of this year and a soon-to-be implemented tougher bankruptcy law also are causing filings to rise, Mr. Gerdano said.
Bankruptcy filings climbed 8.6 percent to 1.39 million in the year ended June 30, according to the Administrative Office of the U.S. Courts.
"That's quite shocking," Mr. Gerdano said. "This is a hangover of an economy which is disproportionately driven by consumer spending. Over the 1990s consumers did more than their share to drive the economic wagon. And the bill has come due, and some people can't pay it."
Personal bankruptcies made up 1.35 million filings over the year. Business bankruptcies represented 37,135 filings.
Industry insiders say pending bankruptcy reform, which will make it more difficult to erase debts by filing for bankruptcy, contributed to the rise of filings in the first quarter, when there were 366,841 such cases.
Bankruptcy-reform legislation was first considered in 1998, when the economy was booming and filings grew to a record 1.44 million, leaving creditors to cover about $40 billion in debt.
In March, the House passed a bill intended to curb abuses of the system that handled 1.25 million cases last year. The new law would force more debtors to pay back at least a portion of their obligations.
The Senate passed a similar bill, but the legislation has been held up in a conference committee that is working out differences between the two versions.
President Bush has said he supports the bill, and industry insiders expect he will sign it in September, which would put the law into effect in early 2002.
"I see so many people losing their homes, their dignity, self-respect, assets; they would have never lost that but for the fact that they got easy credit and did not manage it properly," said John Garza, a bankruptcy lawyer at Garza, Regan & Associates in Rockville.
He expected bankruptcies to slow down in the summer, but the delayed enforcement of the bankruptcy law combined with the traditionally heavy spring traffic have kept him busy.
"Mainly I've noticed a significant amount of people with student loan debt, which is something new," said Mr. Garza, who is president of the Maryland State Bankruptcy Association. "I'm still seeing a lot of people with a debt-to-income ratio well above 50 percent, to 100 percent and even more."
An April study by LowerMyBills.com, an online consumer financial service, found that 40 percent of the poorest Americans spent more than they earned in 1999.
About 32 million households ran at a deficit of more than $8,000, the study found. Families earning $12,338 on average after taxes spent $20,808.
But Catherine Pulley, a spokeswoman for the American Bankers Association, said the increase in bankruptcy filings is being caused partially by the bankruptcy lawyers themselves.
"There has been a lot of aggressive advertising from attorneys trying to get consumers to declare bankruptcy," she said. "Basically, they are trying to scare them because of the pending bankruptcy bill, when in reality, this bill has mostly no effect on them."
The legislation targets wealthy individuals who abuse the bankruptcy code, using it as a financial planning tool, she added.
"According to our statistics, credit-card loss is not the main reason for bankruptcies," she said, listing divorce, job loss and high medical bills as the main reasons people file for bankruptcy.
Bankruptcy filers can choose among three options: Chapter 13, which requires them to pay off some of their debt; Chapter 7, or straight bankruptcy, most often used by businesses and leading to their liquidation; or Chapter 11, which provides almost complete debt protection.


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