Bankruptcy filings soaring again

The lull in filings after the law took effect -- Lundquist counted 102,949 filings in the first quarter, down 73% from the previous year -- was good news for those lenders. One measure of the industry's pain, Fitch Rating Service's credit card index for charge-offs, plunged from a peak of 7.52% in November to 3.29% in February 2006. Fitch analysts say they expect charge-offs for most mainstream issuers to remain below 6% for at least the first half of the year.

Ominous indicators

If charge-offs and other delinquencies start to tick up, however, we could see the pace of bankruptcy filings quickly follow.

"I would look to things like more delinquencies on revolving credit as well as home mortgage delinquencies and foreclosures as pre-indicators, if you will," said Sam Gerdano, head of the American Bankruptcy Institute, who expects this year to end with about 900,000 consumer filings. But Gerdano says he believes last fall's filing rush "sucked so many cases out of the system that it will take quite a while to snap back."

Consider, though, that the bankruptcy rate that so concerned Congress had averaged between 1.2 million to 1.6 million annual personal bankruptcies since the late 1990s. If we add 900,000 new filings this year to the 2 million last year, the average for the two years is 1.45 million. It's hard to see much progress in that.

Lundquist thinks filings could easily return to 90% of the old rate, although the pace will depend on the long-term effects of the new law. "Are more people discouraged from filing bankruptcy? Will more file Chapter 13s instead of Chapter 7s? Will more people chose alternatives to bankruptcy?" Lundquist asked. "It's just too early to know."

Same factors propelling bankruptcies

The factors that helped feed the bankruptcy boom of the last decade are certainly still in place. Those include:

• An enormous expansion of credit by the lending industry, including to customers with shaky repayment histories and questionable ability to repay. The amount of outstanding credit card debt was more than quadrupled since 1990, to $696.7 billion, according to CardWeb.com.

• A large segment of the public that's financially illiterate. Only one-third of adults in a recent poll had a good understanding of basic economic and personal finance concepts, according to a Harris Interactive study prepared for the National Council on Economic Education.

• Interest rates with no caps. Many credit cards now come with penalty rates above 30% which can be triggered by a single late payment. Overextended consumers facing those kinds of finance charges can quickly find themselves unable to keep up with payments.

• A growing number of people who are uninsured, or underinsured, against medical bills. The Census Bureau counts 45 million uninsured, and a recent Commonwealth Fund study found 41% of moderate- to middle-income adults did not have health insurance for at least part of 2005, up from 28% in 2001. A Harvard University study found medical bills were a factor in half of consumer bankruptcies.

Given these trends -- and Congress' unwillingness to tackle any of them -- any lull in filings may well be as fleeting as a teaser rate.

Liz Pulliam Weston's latest book, "Easy Money: How to Simplify Your Finances and Get What You Want Out of Life," is now available. Columns by Weston, the Web's most-read personal-finance writer and winner of the 2007 Clarion Award for online journalism, appear every Monday and Thursday, exclusively on MSN Money. She also answers reader questions on the Your Money message board.

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