It may have seemed like a good idea at the time, at least for lenders: a substantially fortified bankruptcy law that made it tougher for consumers to stiff credit card companies, banks and similar firms. And it seemed to work, significantly reducing the number of bankruptcy filings.
Until the meltdown.
Now, pummeled by unemployment, foreclosures, the credit crunch and other manifestations of the worst recession in memory, Americans are filing bankruptcy petitions at rates approaching those that mounted before the new bankruptcy law took effect in October 2005.
“That law was draconian, and it included huge disincentives to filing for bankruptcy,” said Robert Lawless, a professor of law at the University of Illinois College of Law and a nationally recognized expert on bankruptcy rules, regulations and rates. “So these numbers show that people are really hurting right now.”
Not just people. A lot of people.
Exactly 699,104 bankruptcy petitions were recorded in the United States during the first six months of this year, according to data collected by Automated Access to Court Electronic Records. The vast majority were personal bankruptcy petitions, filed by hard-pressed consumers.
In 2004, just before the more stringent rules took effect, 6,339 bankruptcy petitions were filed during an average business day. In 2006, with the law fully in force, the rate plunged to 2,372 per day. Now, Americans are flooding back into bankruptcy court at the rate of 5,593 per day.
The data on bankruptcy illustrates the coast-to-coast pain. Per-capita rates have increased in virtually every state since 2007 — in many cases, doubling or tripling.
“As unemployment, foreclosure rates and health care costs continue to rise, more consumers are turning to bankruptcy as a last financial resort,” said Samuel J. Gerdano, executive director of the American Bankruptcy Institute, a 12,000-member group that researches and monitors bankruptcy trends.
And it truly has become a last resort.
Intended to curtail the easy, even serial, filing of bankruptcy petitions by some consumers, the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 mandated higher filing fees, a means test for eligibility, an eight-year moratorium between filings, counseling programs and other measures.
Being broke rises in price
As a consequence, the process has become so complicated that professional legal counsel is a virtual necessity, again raising the cost of seeking protection in bankruptcy court.
“I was not a supporter of the law,” Lawless said, “but everybody agrees it made it more expensive to file and you had to do more work.
“So, we certainly would expect to see people using the court less,” he said. “Instead, we’re seeing about the same use as before.”
But it is important to remember, Lawless noted, that “bankruptcy is not really the problem. It’s a symptom” of the sharpest economic downturn since the Great Depression.
Though the monthly rate of bankruptcy petitions dropped slightly in June, nearly all experts consider that a statistical quirk.
By year’s end, about 1.45 million bankruptcy petitions will be filed, Lawless said. The American Bankruptcy Institute offers a similar prediction of more than 1.4 million petitions.
The situation certainly is not getting any better and it might be getting worse. We won’t see any improvement for a while.
|— Bob Lawless |
University of Illinois College of Law
Filing spikes lag behind layoffs
That would represent an increase of about 35 percent over last year’s numbers. The modern record is about 2 million bankruptcy petitions, set in 2005 as filings spiked just ahead of the effective date of the new law.
“Bankruptcy filings are a lagging indicator of the economic times,” Lawless said. “The jump in the unemployment rate in May and June are not in these figures.
“What we are seeing now is from last summer and last fall,” he said. “What we’re having today will show up in the bankruptcy courts next year.”
And, had the tough new law not been passed, even more Americans would be crowding into bankruptcy court.
“The situation certainly is not getting any better and it might be getting worse,” Lawless said. “We won’t see any improvement for a while.”