The bankruptcy boom is back

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."

The reduction in filings after the law took effect -- first-quarter filings were down 73% from the same period a year ago, and second-quarter cases were 69% lower -- has been good news for those lenders. One measure of the industry's pain, Fitch Ratings' credit card index for charge-offs -- debt unpaid after six months -- plunged from a peak of 7.52% in November to 3.29% in February 2006.

Ominous indicators

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

Credit counselors are already reporting an increase in the number of debtors seeking help because of high gas prices and adjustable-rate mortgages that have reset at higher rates. Those debtors may well enter the bankruptcy pipeline in the next year or so.

Doing so will cost them more than in the days before bankruptcy reform. The average cost for a Chapter 7 filing used to be around $1,000, said researcher David Skeel of the American Bankruptcy Institute. Now the going rate is about twice that. Chapter 13 filings tend to cost about 50% more.

"It is more costly to file and more of a hassle," Skeel said. "One of the great ironies (of bankruptcy) is that you can be too poor to file … and there could be more people" in that predicament.

Lundquist thinks filings could eventually 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 past 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% that 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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