Record Numbers File for Personal Bankruptcy
Preliminary estimates report 200,000 personal bankruptcy filings during the final week before the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 becomes effective on October 17, according to Lundquist Consulting, a company that compiles bankruptcy statistics, MarketWatch reports. The total number of bankruptcy cases for 2005 is expected to exceed last year’s record of 1.3 million.
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The new law prohibits new filers whose income exceeds the state median from filing for Chapter 7 bankruptcy, which eliminates most debts. Individuals seeking bankruptcy protection who do not meet the income requirements for Chapter 7 will be required to file under Chapter 13 and accept a repayment schedule ordered by the courts. All new filers will be required to undergo credit counseling.
In Denver, the Associated Press reports, “the line at bankruptcy court formed before dawn and quickly grew to more than 300 people as it stretched outside. People waiting to meet with a bankruptcy trustee spilled from a waiting room to a hallway in Chicago according to Associated Press reports.
“We are seeing a little bit of everything, some of it’s for medical reasons, some of it’s a job loss and some are behind on mortgage payments,” Veronica Weaver, an attorney in Texas told the Associated Press.
The total number of bankruptcy claims filed since October 1 in Lousiana is 1,554, ten times higher than for the same period last year. Hundreds of these filings result from the effects of Hurricane Katrina, according to WDSU.com.
John Ventura, a Texas attorney and the author of The Bankruptcy Kit, told USAToday that over the long term the law would not reduce the number of bankruptcy filings because so many people are carrying large amounts of debt, especially credit card debt.
As Americans use credit cards to finance basic needs like gasoline, MarketWatch says, consumers are more likely to be pushed into bankruptcy by tough economic conditions, and credit card companies, who experience charge-offs from bankruptcies may end up with ongoing losses.
Seven out of ten low- to moderate-income households said they used credit cards to pay for groceries, car repairs or house repairs according to a telephone survey of 1,150 adults conducted by ORC Macro for Demos, a nonprofit group that looks at economic opportunity and the Center for Responsible Lending, a nonprofit advocacy group that focuses on predatory lending, according to a separate report in MarketWatch.
Survey respondents earned 50% to 120% of their county’s median income, the report said. Average credit card debt for this group was $8,650. Twenty-nine percent had debt of more than $10,000 and 21 percent owed less than $2,500.
One-third of the consumers reported using credit card for basic needs four times in the last year according to the survey report. Only 12 percent said they never used credit cards for these expenses, MarketWatch reports.
Forty percent of homeowners in the survey refinanced their homes or took out a home equity line of credit in the past three years, the survey revealed. Of these, half used the money to pay down credit card debt.
The study’s authors recommend changes to credit-card policies that disadvantage consumers, as well as a renewed emphasis on savings as “an alternative to short-term credit,” MarketWatch reports.
“The amount of debt people are carrying makes them live on the edge,” Ventura told USAToday. “They will get less benefit from filing for bankruptcy, but . . . they’re going to continue to file in high numbers.”