Bankruptcies on the rise again


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The number of people hitting financial rock bottom across the nation continues to grow at an alarming rate while bankruptcy filings in the greater Pittsburgh area suggest that the region has been less affected by falling home prices, rising unemployment and unmanageable debt -- but not totally immune to their influence.

Personal bankruptcies could reach an estimated 1.4 million nationwide by the end of this year, according to the American Bankruptcy Institute. That would be a 23 percent increase from the 1.07 million Americans who sought legal protection from their creditors last year.

Meanwhile, bankruptcy filings for businesses and consumers in Western Pennsylvania have increased 10 percent from 3,338 during the second quarter of 2008 to 3,564 filings in the second quarter of 2009, the latest figures available. Nationwide, bankruptcies have risen 27 percent during that same time frame -- nearly three times as fast.

"We're getting back to where the numbers were normally prior to the bankruptcy laws changing in 2005," said Matt Herron, a bankruptcy attorney at Debt Doctors, Downtown.

With job losses recorded in each of the past 22 months, adding more than 7 million to the ranks of the unemployed, many consumers not only are out of work, but are deeply in debt and about $10 trillion poorer than they were two years ago due to the decline in equity markets.

Home foreclosures could reach a record 1.7 million this year, and credit card companies are adding more stress to already stress-out households by changing policies to raise interest rates and fees as high as possible at the slightest hint of any financial trouble.

"Next year's bankruptcy numbers will probably be close to this year's numbers," said Dr. Bernard Weinstein, professor of business economics at the Cox School of Business at Southern Methodist University in Dallas. "It will take another year or two for households to get their balance sheets back in order, and unfortunately part of that process includes more foreclosures and bankruptcy filings."


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Corporate bankruptcies also are climbing as businesses struggle to pay creditors.

Easy monetary policy in 2006 and the first half of 2007 led to massive numbers of leveraged buyouts with very advantageous terms for the debt issuer, and there was a big increase in commercial back mortgage securities issued, said Leonard Rosenthal, a finance professor at Bentley University outside Boston.

"With the economy in the tank, many of these issuers were not able to meet their interest obligations or failed to live up to other terms in the debt contract," he said.

"The result is a record number of bankruptcies and more to follow as some $4.2 trillion of various types of corporate debt comes due in the next five years."

Congress passed a law four years ago making it harder for consumers to prove they should be able to eliminate their debt entirely in a Chapter 7 filing, but the 2005 reform measure has done little to curb the number of people facing financial failure.

More Americans filed bankruptcy in October than in any month since the 2005 changes to the bankruptcy law. The 1.2 million bankruptcies filed through October already have surpassed last year's 1.1 million, according to Aacer, an Oklahoma City-based bankruptcy database.

"The 2005 law change was useless," Mr. Herron said. "Most of the cases I would have filed prior to the bankruptcy code changing I still would file them the same way. ... Not a whole lot has changed since the code changed."

One of the main modifications to the bankruptcy code was that if a person earned a certain level of income the court presumes he or she has the ability to pay their debts back. Instead of allowing them to file Chapter 7 they are put into a Chapter 13 bankruptcy and forced to pay back the debts on a court-ordered payment schedule.

A single person who earned less than $44,688 can file Chapter 7 and wipe out their debt obligations. For a family of two, the income threshold is $52,000. For a family of four, it's $78,000.

"Personal bankruptcies continue to climb, since the job market is continuing to grow too slowly," said William Moore, of CT Lien Solutions in San Francisco. "We are almost seeing a slow economic recovery without job creation."

Bill Schorling, a bankruptcy attorney with Buchanan Ingersoll & Rooney law firm in Philadelphia, said most bankruptcy filings are caused by too much debt, a loss of income related to unemployment, divorce, or health problems that lead to unpaid medical bills.

"We're seeing the increase in bankruptcies because people are losing their jobs," Mr. Schorling said.

Although bankruptcies in the Pittsburgh area are growing at a slower rate than in the rest of the nation, the numbers have nonetheless kept edging higher.

"A lot of the people we see don't want to file for bankruptcy, but they realize this is the only way to get from under the unbearable stress," said Caryn Bilotta, a manager at Advantage Credit Counseling Services on the South Side. "If they are trying to keep their home and have mortgage issues, bankruptcy may be the only way to keep their home and get back on track."

The new bankruptcy law requires filers to undergo pre-bankruptcy counseling before their case is considered by the court. And before the bankruptcy is discharged, filers are required to take a financial literacy course.

Although bankruptcy can give someone drowning in debt a new lease on life, it can also be an emotional, stressful and financially devastating event.

That is why members of the United States Organizations for Bankruptcy Alternatives have been encouraging more people to consider debt settlement and debt negotiation instead.

"With over 1 million bankruptcies filed so far this year, I don't see it going down," said Jenna Keehnen, executive director of the Houston-based group that represents 200 debt negotiation and debt settlement companies. "The bankruptcy system was not designed to handle this type of volume.

"Without debt settlement and debt negotiation, we'd be further burdening an already overburdened bankruptcy system," she said.

Mr. Herron said he expected the Pittsburgh area to see a spike in bankruptcy filings, most likely tied to jobs. He already is seeing more cases here that are a result of lost jobs rather than issues involving housing, failed businesses or unpaid medical bills.

"The mentality that people who file for bankruptcy are deadbeats who want to blow off their debts is just a myth," he said. "If you sat down in front of the people I do every day, you would come to realize that."


Tim Grant can be reached at tgrant@post-gazette.com or 412-263-1591. First Published November 24, 2009 5:00 AM


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