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In spite of stricter laws, metro-east bankruptcy filings rise |
| by Will Buss, Belleville News-Democrat - 12/21/2008 |
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| "In November, 100,000 U.S. consumers filed for personal bankruptcy. More than 32 percent of them filed under Chapter 13, which allows debtors to restructure and repay creditors over 36 to 60 months. " |
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The past five years have not gone according to plan for the Wilke family.
"I would have never thought this would be somewhere we would have to be," said Debra Wilke.
She and her husband have lived in their Belleville home for almost 20 years, raised two sons and had saved for retirement. But about five years ago, her husband lost his job when his employer cut his shift. He then suffered two transient ischemic attacks, often referred to as "TIAs" or mini-strokes, and couldn't work for a few months. Their oldest son lost a good-paying job.
The couple was losing their grasp on the once financially stable life they had built for their family. Medical bills piled up, and Debra had to empty her IRA to pay for them. When her husband returned to work, it was at a job that paid about half his previous position
"It's just snowballed," Wilke said. "Every year, it got a little tighter, and a little tighter, and a little tighter."
Last month, the couple made a difficult decision and filed for bankruptcy. And they are not alon
Many like them generally are not irresponsible people. They are people who want to pay their bills, but don't have the resources after a life-changing event.
In November, 100,000 U.S. consumers filed for personal bankruptcy. More than 32 percent of them filed under Chapter 13, which allows debtors to restructure and repay creditors over 36 to 60 months. That's slightly fewer than the total filings recorded in October but more than 39 percent higher than the number reported in November 2007.
This is happening after Congress passed the Bankruptcy Abuse Prevention and Consumer Protection Act, a law enacted in October 2005 to make it more difficult for consumers to file for Chapter 7 bankruptcy, under which most debts are forgiven.
Immediately after the law went into effect, the American Bankruptcy Institute reported consumer bankruptcies dropped from the 2 million reported in 2005 to 617,000 in 2006. The institute, which provides Congress and the public with analysis of bankruptcy issues, has since recorded that total bankruptcies have jumped to more than 850,000 last year and is on pace to exceed 1 million new cases this ye
Also in 2005, researchers at Harvard University completed a study that found that 50 percent of all bankruptcy filings were partly the result of medical expenses. The average out-of-pocket medical debt for those who filed for bankruptcy was $12,000 and that 68 percent of those who filed for bankruptcy had health insurance. The study concluded that every 30 seconds in the United States, someone files for bankruptcy in the aftermath of a serious health problem.
Alton bankruptcy attorney Leslie Woods said 90 percent of her clients have medical bills. Many of them are uninsured, and that leads to higher medical bills because they don't get the discount that those with medical insurance do. Woods said the increase may be the bounce from the bankruptcy reforms that took place in 2005.
"Many of the people who filed in 2005 are back in the same place they were before they filed," Woods said.
More filings expected
Washington University law professor Dan Keating said he expects record bankruptcy filings to continue. He cited that individual bankruptcy filings went up from 8 percent in October 2007 to 34 percent in October this year.
"If this trend line continues, we'll likely see over the next year or so that many will be filing with rates as high as they were before the consumer bankruptcy revision for 2005," Keating said.
Bankruptcy attorney Bill Mueller said he anticipates that the new year will be a busier year for him and his partners at Mueller & Haller LLC, which conducts business as The Bankruptcy Center in Belleville. In 2006, the Southern District of Illinois had 40 percent of the bankruptcies it had the year before when the bankruptcy law changed. This year, it's up more than 50 percent.
"It's creeping back up," Mueller said. "I do see an increase. I do believe that over time, we will get back to those numbers from 2003 and 2004, unfortunately."
American Bankruptcy Institute resident scholar Jack Williams said that although the law was designed to reduce the number of personal bankruptcy filings under Chapter 7, he doesn't believe the act has been good for anyone.
"I don't think that benefits consumers for the greater good," Williams said. "I think the bankruptcy abuse that drove a number of the changes was the boogie man. It was not, actually, supported at the level they suggested. If anything, the continued post-2005 bankruptcy practices have confirmed that. I think the system was too lax on abuse, and there were unfounded changes wrought by the 2005 amendment."
Collinsville bankruptcy attorney Karl Wulff said all the new law has done is double the cost debtors have to incur to work with lawyers.
"It's just basically taking something that is and ought to be simple and straightforward, and the new law has made it needlessly complicated and tedious," Wulff said. "It increased the cost to make it harder to try to get bankruptcy relief."
In Pontoon Beach, bankruptcy attorney Steven Stanton said the new law is so restrictive and has forced lawyers to spend three to four hours to file something that used to take minutes.
"It's a terrible form they came up with, just terrible," said Stanton, of the Stanton Law Offices
Mueller also has seen a shift in clientele. Once upon a time, bankruptcy was primarily a choice for the poor. Today, he said he has filed for clients from every economic status level.
"I've filed for members of the military, ranking officers, clergy, lawyers, doctors and people who make a large income who are still above what they can handle," he said. "We have some with six-figure incomes."
Although the new law intended to tighten Chapter 7 regulations, Wulff said he is seeing a rise in Chapter 7 filings versus Chapter 13 filings. He said that before the collapse of the real estate market and credit crisis, about half of the cases had filed under Chapter 7.
"Now, with equity no longer in their houses to save, what they are doing is throwing in the towel and filing Chapter 7 and surrendering the house," he said.
Mueller also said that the mortgage crisis, which has been driven by adjustable rate loans, also has pushed consumer confidence to a new low and has consumers taking drastic measures, like abandoning their homes.
"I have never seen this number of people coming in and saying, 'I'm giving up my house,' doing Chapter 7 and just walking away," Mueller said. "In years past, they would have tried to something like Chapter 13 to restructure their mortgage."
Attorney John Johnston, of the Dixon & Johnston law firm in Belleville, said he has had many clients file under Chapter 13. Johnston said this option can help individuals catch up on a delinquent mortgage, but it probably won't help afford the monthly payment.
"We're filing a whole lot of those right now," Johnston said. "The one thing about Chapter 13 that it can't do right now is it can't change payments. If you really can't afford your mortgage payment, Chapter 13 isn't going to solve the problem."
Durbin seeks changes
In Washington, U.S. Sen. Dick Durbin, D-Illinois, has been pushing to change the bankruptcy code to allow bankruptcy judges to alter the terms of distressed mortgages on primary residences. A year ago, the Illinois senator introduced the Helping Families Save Their Homes in Bankruptcy Act, which would allow mortgages on primary residences to be reconstructed in bankruptcy. Durbin tried to pass the bill on three separate occasions but was met with opposition from the Mortgage Bankers Association each time.
Given the recent rise in personal bankruptcies driven by the mortgage crisis, the senator is planning to reintroduce the bill when legislators convene Jan. 6 in the 111th Congress.
"We have plans to restore it and pursue it with even more quality time," said Durbin's press officer, Max Glieschman. "The senator was one of the first to identify that the housing crisis was a catalyst to the economic crisis."
President-elect Barack Obama's economic team of advisors has a plan that would accelerate the decline in mortgage rates as the government has committed to buy $600 billion in bad debt from home loans. The plan calls for federally chartered mortgage financiers Fannie Mae and Freddie Mac, which were seized by the government in September, to reduce 30-year fixed mortgage rates from the current 5.5 percent average to around 4.5 percent. Fannie Mae and Freddie Mac would buy the mortgages at the lower rate from lenders, and the government would then purchase securities issued by the two lenders that were backed by the loans.
Earlier this month, a bankruptcy judge at the U.S. Bankruptcy Court in East St. Louis granted the Wilkes' request to file for bankruptcy under Chapter 13. Debra Wilke said she and her husband were approved for a 60-month repayment plan and have to attend a class.
At 48, Wilke said that she and her husband, who is 50, will be able to restructure their credit better through bankruptcy than they could have done on their own. She said they still hope to be able to retire in 10 years.
"It's just good knowing you have peace of mind," Wilke said. "It's going to help us get our heads straight."
No one should be ashamed of how the system works, she added. The federal bankruptcy court system is very fair and safe.
"Anybody can do it. Don't be ashamed. Everybody needs help. This is one way to get back on your feet and not have to listen to creditors on the phone."
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| Contact Email: wbuss@bnd.com |
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