State’s bankruptcies soar despite overhaul
Tom Abate, Chronicle Staff Writer
Sunday, July 4, 2010
Five years ago, bankruptcies soared to record levels as debt-strapped consumers raced to seek court protection before Congress changed the law to curb what had been considered an epidemic of filings.
For a while, filings dropped, but the recession has forced so many people into dire straits that bankruptcies in California are setting new records.
“The states with the most acute housing crises have had the most elevated filing rates,” said Sam Gerdano, president of the American Bankruptcy Institute.
The volume of filings nationwide also is approaching 2005 levels, as the Bush-era reform bill that raised fees and eligibility standards is rendered moot by rising joblessness and sinking home values.
“The laws of economic gravity are more powerful than the laws of Congress,” Gerdano said.
The upward trend in filings rekindles the debates that occurred five years ago over whether irresponsible consumers or predatory lenders are primarily to blame for bankruptcies, and whether the current law is the right fix or an unfair burden for debtors seeking a fresh start.
Scott Talbott, with the Financial Services Roundtable, an industry group that backed the changes, said the recession-induced surge of filings proves that the reforms have not prevented overburdened debtors from getting a court-ordered fresh start.
“The fact that the numbers are up means people still have access to the bankruptcy courts,” he said.
ongress’ balancing act
Henry Sommer, past president of the National Association of Consumer Bankruptcy Attorneys, which opposed the 2005 law, called the changes unfair.
“There are a lot of people who are in a really bad way who can’t come up with the money to file,” he said.
The Constitution empowers Congress to establish “uniform laws on bankruptcies throughout the Unites States,” putting lawmakers on the teeter-totter between debtors and lenders forever eager to tip the scales of justice toward their cause.
Bankruptcy law tilted toward consumers in 1938 when the Depression-era Congress allowed federal bankruptcy courts to completely absolve borrowers from certain obligations and give them a clean slate.
Congress pushed the balance back toward lenders in 1978 when it differentiated between two types of consumer bankruptcies: Chapter 7 filings that continued to allow eligible debts to be completely erased, and Chapter 13 pleas that required debtors with the ability to make partial repayment to do so under court supervision.
The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 further favored lenders by raising filing fees and tightening the requirements for getting a clean slate under Chapter 7 with an eye toward steering more applicants toward Chapter 13.
The effects of the new law are debatable given that the recession is thwarting the reformers’ goal of capping a long, steady rise in bankruptcy filings.
One thing is clear: It costs more to go belly-up.
The Government Accountability Office, the nonpartisan watchdog agency of Congress, told lawmakers in June 2008 that the 2005 law boosted Chapter 7 expenses from about $914 to $1,477, including legal, filing and counseling fees.
That office did not put a figure on the more complex Chapter 13 filings, but said that in most cases the attorneys fees charged to debtors had risen
55 percent or more.
Lois Lupica, a law professor at the University of Maine, is in the middle of a multiyear study to get a better fix on costs and address an even more important but contentious question – do these changes keep some debtors who may qualify for bankruptcy from seeking the protection of the courts?
Lupica, who refused to speculate before finishing her study in the next year or so, framed her objective this way: “Are there people for whom bankruptcy has become too expensive?”
E-mail Tom Abate at email@example.com.
This article appeared on page D – 1 of the San Francisco Chronicle