Bankruptcies on the Rise

RALEIGH, N.C. — The number of U.S. 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, N.C., 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.”

Nearly 1.2 million debtors filed for bankruptcy in the past 12 months, according to federal court records collected and analyzed by the AP. Last month, 130,831 sought bankruptcy protection — an increase of 46 percent over March 2008 and 81 percent 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 2 million cases in 2005 to 600,000 in 2006. But now bankruptcies are booming again.

Stigmatizing’ event
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, 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, but added, "It’s still a very stigmatizing, 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 percent amid the economic contraction in 2001, and about 15 percent during the recession of the early 1980s, according to the Administrative Office of the U.S. Courts.


West hit hard
In March, bankruptcy filings jumped the highest across the West. In Arizona, filings rose 48 percent from a year ago.
They were up 46 percent in Idaho, 45 percent in California and 44 percent in Nevada, though those were trumped by Delaware, home to many large corporations, which saw a 56 percent jump.

Under the 2005 law, Congress imposed higher fees on those seeking bankruptcy and began requiring credit counseling sessions and a means test to assess debtors’ ability to pay what they owed.

Lawless said his research found that the law simply increased the cost of filing by 50 percent and led many more people to cling to false hope longer.

He argued that only a tiny number of people were abusing the system before the 2005 shift, and that the law punishes those who genuinely need help.

"The point of the bankruptcy system is to give the honest but unfortunate debtor a fresh start,” Lawless said.

"The fact that people are waiting longer to file shows just how mean-spirited the law is,” he added."



by the associated press