Surge in Filings Related to Change in Law that adds tougher Requirements
The drop-off in consumer bankruptcy petitions since the nation's bankruptcy law changed belies the fact that there are still many Americans in serious financial trouble.
Bankruptcy filings peaked at a record of more than 315,000 a week before the law took effect Oct. 17 but have since fallen to a weekly rate of about 3,500, according to Lundquist Consulting Inc., a financial-information and consulting company based in Burlingame, Calif.
"As far as what's happening in the (bankruptcy) courts, it's like the snake that swallowed the rat," said Texas lawyer John Penn, who is president of the American Bankruptcy Institute in Washington. "It's going to take a while to digest, but the system will go on."
But Penn and other experts don't expect filings to remain so low. "We have not changed either the laws of economics or basic human nature," Penn said.
Financially troubled consumers rushed to file before Oct. 17 because the new law is expected to pressure more debtors into Chapter 13 bankruptcy programs, which require them to pay creditors on a court-approved schedule, rather than into Chapter 7, which discharged most of their unsecured debts. Before the change, nearly three-quarters of the consumer cases were Chapter 7.
The rules also require much more paperwork, including tax forms and certified income statements, as well as mandatory credit counseling in advance of filing.
Still, because of the fall filing rush, total bankruptcy petitions this year already exceed 2 million, surpassing the previous record of 1.66 million filed in 2003. Last year, just under 1.6 million petitions were filed.
Are levels of 1.6 million and higher now history? Experts don't think that's necessarily the case.
David Greer, a bankruptcy lawyer in Norfolk, Va., who is vice chairman of the consumer bankruptcy committee of the American Bar Association's business-law section, said that many Americans continue to have debt problems that can tip them into bankruptcy.
"I think probably it is not going to be as dramatic a falloff as you might think," Greer said. "People will still file, regardless of the difficult requirements."
Historically, the Triad has not had as many Chapter 7 cases as other parts of the nation.
"We have about as many Chapter 13 cases as Chapter 7 because local bankruptcy judges, trustees and attorneys encourage filers to work through the debt process to pay creditors something," said Joe Burns, a Chapter 7 trustee for the U.S. Bankruptcy Court in the Middle District of North Carolina.
The desire to avoid a Chapter 7 filing is strong in the Triad, especially given that the majority of applicants are dealing with divorce, a major health crisis or the loss of a job, said Wes Schollander, a lawyer with Schollander Law Offices of Winston-Salem.
Michael Wells, a lawyer with Wells Jenkins Lucas & Jenkins PLLC of Winston-Salem, said that his law firm has seen a lull in bankruptcy filings since Oct. 17 after having "a pretty good surge before that deadline."
"Filings tend to be seasonal and cyclical in nature, many spurred by people getting their first credit-card bill after the holidays," Wells said. "That's why things tend to start picking up around the 10th or 15th of January.
"Most people still grieve having to file for bankruptcy and do it as a last resort. But if people will go to counseling services like Consumer Credit Counseling Service of Forsyth County when they first realize they are treading thin ice financially, some filings can be avoided."
Kathy Banks, an official with Consumer Credit Counseling Service, said that her group has conducted 48 counseling sessions with clients since Oct. 17. She said that the agency also expects an increase in counseling requests in the new year related to credit cards and other debts.
Greer said that the first clues to future bankruptcy-filing levels are likely to come after the holidays.
"Christmas spending catches up, and creditors - who generally relax through December and the holiday season - then put the pressure back on," he said.
In addition, families devastated by the hurricanes that hit Florida and the Gulf Coast this year also may have used up emergency resources by spring and be forced into bankruptcy, experts said.
Credit counselors weren't involved in the process until the law change made it mandatory for consumers to consult these nonprofit agencies within 180 days of filing their bankruptcy applications. The law also mandates that many complete a financial-education course before their bankruptcies are final.
Suzanne Boas, the president of the Consumer Credit Counseling Service of Atlanta, said that her group has been seeing a large number of people in its new bankruptcy-counseling program. The service is one of many nonprofit agencies approved to counsel bankruptcy petitioners by the Justice Department's Executive Office for U.S. Trustees.
Michael Dean, a managing director at Fitch Ratings service in New York, said that the spike in bankruptcy filings has raised the number of charge-offs of debt by credit-card issuers in recent weeks.
Going forward, he said, some debtors may hesitate to file for bankruptcy to avoid the tougher requirements, "but we think that universe is rather small," Dean said.
