US bankruptcies surge despite law

RALEIGH, North Carolina – The number of US businesses and individuals declaring bankruptcy is rising with a vengeance amid the recession, despite a three-year-old federal law that made it much tougher for Americans to escape their debts, an Associated Press analysis found.

‘There’s no end in sight,’ said bankruptcy lawyer Bryan Elliott of Hickory, North Carolina, who is working seven days a week and scheduling prospective clients a month in advance. ‘To be doing this well and having this much business, it is depressing. It’s not a laugh-a-minute job.’
Nearly 1,2 million debtors filed for bankruptcy in the past 12 months, according to federal court records collected and analysed by the AP. Last month, 130 831 sought bankruptcy protection – an increase of 46 per cent over March 2008 and 81 per cent over the same month in 2007.
Bob Lawless, a professor at the University of Illinois College of Law, said bankruptcies could reach 1,5 million this year and level off at 1,6 million next year – around the same time economists expect an economic recovery to begin.
Congress voted in 2005 to make bankruptcy more cumbersome after years of intense lobbying from the nation’s lenders, who complained that people were abusing the system. Before the move to change the law, bankruptcies were running at what was then an all-time high of about 1,6 million per year.
The tighter requirements initially appeared to work, with bankruptcies plummeting from a record-shattering two million cases in 2005 – a total that reflected a rush to file before the new law took effect – to 600 000 in 2006. But now bankruptcies are booming again.
‘You wouldn’t get this large of a rise without serious problems in the economy,’ said Lynn LoPucki, a UCLA law professor who researches bankruptcy.
The bankruptcy rate is climbing as well. In the past 12 months, about four people or businesses for every 1 000 people in the country filed for bankruptcy, according to the AP analysis. That is twice the rate in 2006, and close to the average of about five for every
1 000 in the decade leading up to the change in the law.
Lawless said the shame of bankruptcy may have eased somewhat in recent years, but added, ‘It’s still a very stigmatising, traumatic event for most everyone who files.’
Previous recessions also drove people to bankruptcy court, though those increases were more moderate. Bankruptcies went up 19 per cent amid the economic contraction in 2001, and about 15 per cent during the recession of the early 1980s, according to the Administrative Office of the US Courts.
Bankruptcy is considered a lagging economic indicator, since it is generally a last resort. The filings compiled by the AP illustrate the places where the economic meltdown has hit hardest.
In March, bankruptcy filings jumped the highest across the West. In Arizona, filings rose 91 per cent from a year ago. They were up 84 per cent in Idaho, 82 per cent in California and 79 per cent in Nevada, though those were trumped by Delaware, home to many large corporations, which saw a 127 per cent jump.
Emory Clark, an Atlanta bankruptcy attorney who has been in the business for 25 years, said he is seeing more affluent people, many who have lost their jobs.
‘There’s something about human nature or American culture, but people hate filing for bankruptcy,’ Clark said. ‘It really is a stamp of failure. Nobody wants to come in here and pay us money to file. They are forced in because of circumstances.’
Kathy Stevens of Vista, California, opened a tea and coffee boutique in August 2007, and it grew steadily. Then enrolment started to fall at a nearby mom-and-tot gym her customers frequented, and her business took a hit. The gym finally closed in the fall.
Stevens and her husband spent more than US$35 000 to keep the boutique afloat, drawing on their own money and donations from family. After working from 6 am until almost 10 pm, seven days a week for months on end, Stevens realised her store would not survive. The couple filed for bankruptcy two weeks ago.
‘You feel bad, because you never set out to do this,’ Stevens said. ‘We’re trying to put it behind us and lick our wounds and move on.’
Under the 2005 law, Congress imposed higher fees on those seeking bankruptcy and began requiring credit counselling sessions and a means test to assess debtors’ ability to pay what they owed.
-Nampa-AP