- The Washington Times - Friday, May 25, 2001

Bankruptcy filings by consumers and businesses rose 17.5 percent in the first three months of the year as the economy slumped, according to the Administrative Office of the U.S. Courts. The 366,841 filings were the most ever in the first quarter.

The increase is a result of several factors converging, bankruptcy observers say: The economy is slowing down, with consumers spending less and employers laying off workers; and bankruptcy-reform legislation expected to be approved soon is spurring people to file for bankruptcy before it becomes harder to do so.

"People are losing jobs; there's a reduction of income," said Samuel Gerdano, executive director of the American Bankruptcy Institute in Alexandria, Va. "So you're going to have increased pressure on bankruptcy filings."

Bankruptcy filers can choose Chapter 13, which requires them to pay off some of their debt; Chapter 7, or straight bankruptcy, which often leads to a company's liquidation; or Chapter 11, which provides almost complete debt protection.

The record high for a first quarter comes after 10 years of economic growth and after a year of fewer filings than normal.

As the economy boomed, Americans racked up about $35 billion in debt last year alone. Such high spending is correlated to bankruptcy filings, said Mr. Gerdano, but the effect is not immediate.

"Someone doesn't go on a spending spree today and file for bankruptcy Tuesday," he said. "But with a 12- to 16-month lag, the figures are pretty close."

Filings are expected to increase as more companies cut jobs, Mr. Gerdano said. Also, the second quarter traditionally has the year's highest number of bankruptcies.

The record number of bankruptcies comes as Congress nears approval of bankruptcy overhaul. The House in March passed a bill intended to curb abuses of the system that handled 1.25 million cases last year. The bill would force more debtors to pay back at least a portion of their obligations.

The Senate passed a similar bill, but it has been held up in a conference committee appointed to work out differences between the two versions of the bill.

President Bush has said he supports the bill.

Bankruptcy-reform legislation was first considered in 1998, when the economy was hot and bankruptcies grew to a record 1.44 million, leaving creditors to cover $40 billion in debt.

The rates fell last year. But in fall 2000 the economy began slowing down and the stock market plummeted, causing investors to lose money and consider bankruptcy.

The threat of bankruptcy reform has contributed to the increased bankruptcies, said John Garza, a bankruptcy lawyer at Rockville's Garza, Regan & Associates.

"I'm seeing a large number of people who want to file before the bankruptcy law goes into effect," he said. "So anyone sitting on the fence has realized that if they want to file, they have to do it now."

People filing for bankruptcy this year are upper-middle-class professionals with high credit-card debt or heavy investment losses, said Mr. Garza, who is president of the Maryland State Bankruptcy Association.

"I spoke this week to someone who filed for bankruptcy with $150,000 in credit-card debt," he said. "And I had a lawyer come in who lost $600,000 in the stock market last year. He was using credit cards because he wanted to dump everything he had in the stock market … but now he has no portfolio and large credit-card debt.

"I didn't see clients like this a year or two ago."

Mr. Garza said typical bankruptcy filings a year ago were from people who owed about $30,000 to credit cards. Now he is seeing more people with $60,000 to $100,000 in debt asking to file for bankruptcy.

Catherine Pulley, a spokeswoman for the American Bankers Association, said the increase in bankruptcy filings came as no surprise to creditors.

"It's probably too early to speculate about the reasons why," she said. "But this sheds some light on the need for bankruptcy reforms."

Ms. Pulley said the bill would keep "the courthouse doors open to people who truly need the system, but it stops people from using the code in a fraudulent manner."

She added that aggressive lawyers who market to the upper class "looking for a loophole" are contributing to the increase in bankruptcies.

Ms. Pulley said that because of the dot-com crash, many Washington-area tech companies have had to lay off workers, which should be taken into account when looking at the higher numbers.


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