Estimates show that 1.1 million to 1.4 million Americans will file bankruptcy this year as tough filing rules get trumped by tougher economic woes.
The 2008 estimates are way below the more than 2 million bankruptcies in 2005, when a tsunami of cases ended up in court in anticipation of stricter filing laws taking effect. The projected totals represent a rapid return to business as usual at bankruptcy court, despite attempts to make it harder for people to walk away from their debts.
Experts say a bad economy is driving the numbers up. The classic three contributors – divorce, health problems and job loss – are being joined by mortgage as the nation grapples with defaulting subprime loans and a wave of foreclosures.
Last year, total bankruptcies filed in Cincinnati climbed 35 percent to 6,558; in Covington, they jumped 61 percent to 1,629, according to court records.
“The mortgage crisis is feeding the bankruptcy business,” said Robert Goering, a lawyer whose downtown office handles more than 400 bankruptcies a year. “People have ARMs (adjustable rate mortgages) that have increased by a third or a half and can’t make their payments.”
While most people seeking to save their homes file chapter 13 bankruptcies, which put debtors into payment plans for their bills, bankruptcies that don’t protect houses but allow debtors to wipe out their obligations – Chapter 7s – are surging back, according to Burlingame, Calif.-based Lindquist Consulting.
Historically more than 70 percent of all bankruptcies, Chapter 7s fell to about 60 percent of total cases in 2006 and 2007. So far this year, Chapter 7 filings are close to two-thirds of all cases.
Jack Williams, a law professor at Georgia State University and resident scholar at the American Bankruptcy Institute, said bankruptcy cases are a lagging indicator for the economy – which means if a recession began early this year, the caseload will begin to jump this fall and in early 2009.
“Americans spend too much and don’t save enough,” he said. “Once an economic downturn takes hold, those mistakes get magnified. Things aren’t going well out there for people in this economy, and it’s beginning to show up in the numbers.”
Lawyers say bankruptcy can help some homeowners, but it isn’t a slam-dunk solution to keep people in their houses if they’re behind in their payments. Despite a proposal in the U.S. Senate, bankruptcy judges currently don’t have the ability to change contract terms on a mortgage if a homeowner can’t make the payments.
Many homeowners, behind and unable to refinance, are filing Chapter 7 and walking away from their houses.
In some Chapter 13 cases, however, lawyers note that if a home has lost enough value – a common problem in foreclosure cases – a second mortgage, such as a home-equity line of credit, can be converted into unsecured debt that doesn’t have to be fully repaid.