The bankruptcy boom is back

By Liz Pulliam Weston

Consumer bankruptcy filings continue to increase, with Chapter 7 liquidation filings rising 54% in the second quarter compared to the previous three months.

Consumer bankruptcies had plunged following the passage of a tough new bankruptcy law last year. By the second quarter, however, the pace of filings had picked up to 2,200 to 2,300 new filings per business day, more than four times the level in November 2005 after the bankruptcy law went into effect, according to Chris Lundquist, founder of Lundquist Consulting, which tracks bankruptcy trends.

Individuals filed 85,449 Chapter 7 cases in the three months ended June 30 and 142,815 bankruptcy cases overall, a 39% increase from the previous quarter. (Most consumer bankruptcies are either Chapter 7s, which allow people to erase most of their unsecured debts, or Chapter 13s, which require that at least some of the debt be repaid over time.)

New bankruptcy filings

	1st quarter	2nd quarter	Change
Total cases	102,949	142,815	38.72%
Chapter 7	55,671	85,449	53.49%
Chapter 13	47,022	57,039	21.30%

Source: Lundquist Consulting

Currently, courts are reporting an average of 2,300 to 2,400 daily filings, Lundquist said. That's still significantly less than the record filing levels that drove passage of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005. But it may indicate 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, and agencies affiliated with the National Foundation for Credit Counseling say such sessions now comprise one-third to one-half of their caseload, according to marketing director Bob Ensinger.

But many debtors arrive at the counselors in such sorry shape that they can't pay the nominal fee the nonprofit agencies impose. "We're running (these sessions) at a loss," Ensinger said.

Each pre-bankruptcy counseling session costs the agencies an average $50.96, Ensinger said, but the average amount collected is just $37.71. Losing $13.25 on each session is bad enough, but the agencies complain that a larger than expected number of applicants is forcing them to redirect resources that might otherwise be used to help consumers who still have a fighting chance to pay their debts.

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 would not 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.

Continued: More costly, bigger hassle

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