By Alan Zibel
Friday, January 4, 2008
Personal bankruptcy filings in the United States jumped 40 percent in 2007 because of rising mortgage payments, job losses and other financial pressures.
The increase followed a sharp decline from a year earlier, when a new law made it more difficult for consumers to seek bankruptcy-court protection from creditors.
More than 800,000 personal bankruptcy filings were made in 2007, compared with more than 573,000 in 2006 -- the lowest level since 1998, according to data collected by the National Bankruptcy Research Center and published by the American Bankruptcy Institute, a research group in Alexandria.
Samuel J. Gerdano, executive director of the American Bankruptcy Institute, said in a statement that the trend is likely to worsen this year as consumers' high debt loads are "made worse by the home mortgage crisis."
Personal bankruptcy filings for most of this decade had been much higher -- around 1.5 million annually. But after an eight-year campaign by banks, retailers and credit card companies, Congress in 2005 passed the biggest changes in U.S. bankruptcy laws in a quarter-century, mandating an income test to measure a debtor's ability to repay obligations.
Personal bankruptcy filings soared to more than 2 million in 2005, with more than 600,000 filings made in October, when the law went into effect.
Consumers deemed to have insufficient assets or income can still eliminate debts through a Chapter 7 bankruptcy. But those with income above their state's median who can pay at least $6,000 over five years are forced into Chapter 13, where a debt repayment plan is ordered.
Now the pendulum on bankruptcy law could swing the other way.
As defaults and foreclosures rise, congressional Democrats have been pushing for an expansion of bankruptcy judges' authority to reduce the size of home loans. Under existing law, bankruptcy judges can't modify loan terms on a bankrupt borrower's primary residence but are permitted to do so for mortgages on second homes.
Democrats say legislation allowing judges to do so could help more than 500,000 homeowners avoid foreclosure, while Republicans and the mortgage industry say expanding this power would make lenders far more reluctant to extend home loans.