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The lull in bankruptcy filings may already be a thing of the past.
Consumer bankruptcy cases plunged to a 20-year low in the first three months of 2006, reflecting the passage of a tough new bankruptcy law last year. But the pace of new filings is already on the rise.
Courts now see an average of 2,000 new filings a day -- four times the number that were filed in November 2005 after the bankruptcy law went into effect, according to Chris Lundquist, founder of Lundquist Consulting, which tracks bankruptcy trends.
If filings continue to rise at anything like this rate -- which is not a given, but certainly a possibility -- we could see close to 1 million filings by the end of the year.
That would still be significantly less than the record filing levels that drove passage of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005. But it would be a pretty clear indication that the bankruptcy juggernaut was just stalled, not cured, by the new law.
Flood hits credit counseling agencies
Meanwhile, the leading credit counseling organization says bankruptcy reform is putting unprecedented strain on counselors' finances.Bankruptcy filers are required to undergo credit counseling before they can proceed with their cases, but many arrive at the counselors in such sorry shape that they can't pay the nominal fee the agencies impose, said Bob Ensinger, marketing director for the National Foundation for Credit Counseling.
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Surely, this is not what Congress had in mind.
Lawmakers wanted to stem a rising tide of filings, so they passed a law that can divert higher-income filers into Chapter 13 repayment plans, rather than allowing them to file for a Chapter 7 liquidation of their debts. Critics said the bill unfairly punished consumers while putting few restrictions on irresponsible lenders.
Fallout from reform
The reform law's unexpected -- and unpleasant -- consequences started before it even went into effect.Consumers rushing to beat the Oct. 17 implementation flooded the court system, leading to long lines outside courthouses and unprecedented numbers of filings. More than 2 million consumer cases were filed in 2005, including 619,588 in October alone.
Consumers usually don't file bankruptcy on the spur of the moment. Typically, they struggle for years with their finances before giving in, Lundquist said. His research indicates that the "extra" filings last year represented many people who otherwise wouldn't have filed for another 12 to 24 months.
All told, one in every 60 households filed a consumer bankruptcy in 2005, according to the American Bankruptcy Institute. In 2004, one of every 79 households filed; by the first quarter of this year, the rate had plunged to 1 in 261.
| Rank | State | Households per consumer bankruptcy filing |
|---|---|---|
1 | Indiana | 34.41 |
2 | Ohio | 37.19 |
3 | Utah | 39.52 |
4 | Tennessee | 39.7 |
5 | Oklahoma | 40.86 |
National average | 60.16 |
The American Bankruptcy Institute survey ranked all 50 states and the District of Columbia.
| Rank | State | Households per consumer bankruptcy filing |
|---|---|---|
51 | South Carolina | 123.16 |
50 | Alaska | 122.64 |
49 | Vermont | 119.61 |
48 | District of Columbia | 115.93 |
47 | Hawaii | 109.54 |
The American Bankruptcy Institute survey ranked all 50 states and the District of Columbia.
Lenders knew many consumers would try to beat the deadline, but the actual size of the pre-implementation surge caught the industry by surprise. Many credit card issuers, in particular, wound up facing much larger losses than they expected, as I wrote in "Bankruptcy law backfires on credit card issuers."
Continued: Many factors have fed bankruptcy boom
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