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Run-up period, new law brought filings to trickle, but they're rising now

By MICHAEL E. KANELL
Published on: 03/19/06

A new bankruptcy law has made filing for financial relief more costly and
challenging, but it has apparently not stemmed the tide of Americans who are
deep in debt and looking for legal help.

The controversial new rules were supported by banks and credit card
companies, which argued the changes would chill unnecessary filings and make
it harder for people of means to avoid repaying creditors.

A flood of filings came in the fall as thousands rushed to apply before the
harsher federal law took effect in October. In the weeks that followed, the
flow of debtors slowed to a trickle, but the current has lately begun
gathering force, say lawyers who specialize in bankruptcy cases.
"I can tell you that our appointments now are at normal levels again," said
attorney Matt Berry of Atlanta.

The numbers are not back to normal, but they are rising. If they stay low,
that would be a sign the new law has screened out marginal filers - or that
consumer finances are improving. But if the flow of filers keeps rising, it
might signify there were not as many frivolous filers as bankruptcy reform
advocates believed.

That financial vulnerability has been especially pronounced in Georgia.
State residents filed for bankruptcy at a higher rate than all but two
states last year: one household in every 42. The national rate was one in
73.

In October 2004, there were 6,742 filings for personal bankruptcy in
Georgia. In November that year, the numbers dipped to 6,047, then notched
slightly upward to 6,080 in December before falling to 5,332 in January.

This past October, with the new law's effective date looming, a record
number of Georgians - 18,457 - filed.

In November, filings plunged to just 1,551 people. But the filings started
to climb again in December, rising 45 percent to 2,251, according to
California-based Lundquist Consulting.

Overall filings typically decline in January, and they did again this year.
But there was a rise in the number of people filing for Chapter 7 - the
request to erase all debts.

National numbers are due within days from the Administrative Office of the
U.S. Courts, and the data are expected to parallel what has been seen in
Georgia filings - a crest, a steep drop and a modest increase.

Nearly 3 million Americans filed for bankruptcy protection last year. Most
were set on the slick path toward the financial abyss by illness, divorce or
a layoff, experts say.

For Angela Johnson, it was two of the three.

Johnson, 54, was a forklift operator in late 2004, making a respectable
$19.98 an hour. Then, in short order, she divorced and was laid off.
It took her more than six months to find another job, and by that time she
was neck-deep in debt. And the best job she could find paid just $9 an
hour - nowhere near enough to make up lost ground.

"I work for my check," she said. "But $9 an hour - I haven't made single
digits since the early 1980s. But I had to take the work that was available.
"You get up at 3:30 [a.m.] and work for 10 hours, and you are thankful to
have that. You feel blessed to have the job."
She said she resisted filing for bankruptcy - but she was in deep and
getting deeper. Add all the credit cards, and her debt came to nearly
$20,000. She filed for Chapter 7 protection.
"
People come in because they have run out of alternatives," said Emory Clark
of bankruptcy specialists Clark and Washington. "People hate to come in
here. So they wait until their house is in foreclosure, the repo man is
circling the block and their paycheck just got garnished."
'A lot more hoops'

That part hasn't changed with the new law.

"The new bankruptcy law doesn't make people make mortgage payments. It won't
keep people from losing their jobs," said attorney Schuyler Elliott of
Norcross. "There are just a lot more hoops to jump through."

The new bankruptcy law does make entering bankruptcy more expensive and more
difficult.

Even so, after several months of relative quiet, the number of people
seeking bankruptcy is swelling again.

Unlike filers who came in before Oct. 17, those who come to lawyers now find
that before they can file they must get financial counseling. That delays a
filing, which may be a crucial penalty for a debtor who faces imminent
foreclosure on a home.

They still must choose which type of bankruptcy: Chapter 13, which requires
regular payments on at least part of their debts, or Chapter 7, which
virtually wipes out debt.

But they will find the choice is not entirely up to them. There is now a
means test, meant to prevent debtors with higher incomes from escaping all
debts under Chapter 7.
Those who have filed since Oct. 17 also discover the search for relief is
more expensive than it was a few months ago - starting with attorney costs.
Lawyers charge more because the more complicated law requires more work.

"I would say we are charging about 50 percent more for a Chapter 13," said
attorney Berry. "For Chapter 7, on average, it had been $800 to 1,000. Now
it's $1,300 to $1,800 - that's for a nothing case."

But most of those already near-buried in debt are not going to balk at
adding a relative trifle to the pile, said Elizabeth Warren, professor at
Harvard University Law School and co-author of "The Two-Income Trap: Why
Middle-Class Mothers and Fathers Are Going Broke."
"The new laws will drive up the costs for debtors and shrink the protection
available, but that doesn't necessarily mean that fewer people in trouble
will turn to bankruptcy," she said.

"Instead, it means that some of the poorest families will be priced out of
the system, and some people will lose homes or cars that, under the old
rules, they could have caught up on their payments and gotten paid off.
People will still go broke. The new laws won't have any effect on that harsh
truth."

More obligations

Even as the law erected higher barriers to bankruptcy, the buffers that keep
an American out of bankruptcy have grown ragged and thin.
The Federal Reserve keeps track of how much the average American's
disposable income is absorbed by regular payments on mortgage, credit cards,
auto loans or leases, and other debts.

Between 1985 and 1995, that financial obligation, as a percentage of income,
rose from 16.94 to 17.35. It has risen now to 18.56 - and has climbed to
28.79 for renters, according to the Fed.

"When you are living paycheck to paycheck, it doesn't take much to start the
ball rolling and it ends up in my office," said attorney Clark.

One sign of stress is the number of delinquencies on credit cards, which hit
a record in the third quarter of last year.

Relatively few people have security - the ability to survive a stop in the
steady flow of paychecks, said Steven R. Jacob, an Alpharetta bankruptcy
attorney. "If you don't have six months of income in the bank, then you are
a potential candidate."

Always a stigma

In the past five years, there have been about 9 million filings for personal
bankruptcy. The numbers have risen steadily over the years, and if the new
bankruptcy law slows that trend, it will accomplish something the stigma of
financial distress has not.

No matter how commonplace it has become, bankruptcy is embarrassing - or
even shameful, said sociologist Deborah Thorne of Ohio University, who has
studied bankruptcy for eight years.

"The stigma is extreme," she said. "It is the ultimate American failure. It
is the last arena where we believe we have control of our own destiny. And
we don't."

Financial consequences

Even under the older, more lenient rules, more than half of those who file
Chapter 13 could not keep the payment arrangement, said Harvard's Warren.

"They lost their jobs, their kids got sick, the car broke down and they just
couldn't make the payments. A repayment plan may sound good, but in the
harsh realities facing some of these families, it just won't work. These
families may try, but only a Chapter 7 liquidation will help them out."
And once they return to the economic mainstream, they face financial
consequences, according to research economist Jonathan Fisher with the
Bureau of Labor Statistics.

. After bankruptcy, people can usually get credit but may have a lower
credit limit. And they typically pay 1.6 percentage points higher for credit
cards.
. They are more likely to be rejected for loans. If they do get loans, they
often pay more. Former bankruptcy filers typically pay about 3.8 percentage
points more for auto loans.

The number of bankruptcies has been rising for a long time.

In 1985, just 341,233 people filed for personal bankruptcy protection. Those
consumer filings represented 83 percent of the total bankruptcy filings. In
the first three quarters of last year, the 2.61 million consumer filings
made up 99.8 percent of the total.

Perhaps the surge in filings last fall was the peak - more restrictive rules
and an improving economy may dampen the need for bankruptcy.
At least, that's the hope. But there just isn't evidence yet that the
American consumers' need for bankruptcy is ebbing, said Suzanne Boas,
president of Consumer Credit Counseling Service of Atlanta.

Since mid-October, the agency has done nearly 26,000 bankruptcy counseling
sessions in North Georgia and three other states where it operates, most of
them with people referred by the new law's requirements, said Boas.
"We've had to hire 35 new counselors and 10 telephone, client-service
representatives. And we have more hiring to do."