Choosing Bankruptcy to Stay Afloat

The family -- the couple and their daughter -- had to go on what Jerome calls "the poor man's budget." That means buying a bag of 15 chicken legs and thighs, four boxes of macaroni and cheese for $1, three cans of green beans for $1, a big can of spaghetti and meatballs for $1.84, a 20-pound bag of rice for $5, some cereal, grits, eggs, bread, milk and juice. "You stick to that, and that comes under $100" a month, he said.

Still, the couple has not been able to keep up with the mortgage. One of three cars has been repossessed. The electric company has sent a cutoff notice. Phone service has been suspended.

Late and missed payments damaged their credit score so much that they couldn't get any lenders to refinance at more favorable terms. Then their mortgage company scheduled a foreclosure. Filing for Chapter 13 fended that off.

"There was nothing that I could really do," Jerome Smith said. "My hands were tied."

Congress recently considered a proposal by Sen. Richard J. Durbin (D-Ill.) to let bankruptcy judges cut interest rates and principal on troubled mortgages. But that plan was scuttled last month. Instead, consumers must operate under the law passed in 2005, which was intended to get people like the Smiths to choose other alternatives. In response to critics, such as credit card issuers who complained that people sought bankruptcy too frivolously, Congress enacted tighter income limits, tougher standards for measuring a debtor's ability to pay and mandatory credit counseling.

Personal bankruptcies reached a peak of 2.04 million that year as debtors rushed to file before the changes went to effect. The number dropped precipitously in 2006 but started climbing back up in 2007, according to the Administrative Office of the U.S. Courts.

In the District, there were 358 Chapter 7 filings in 2007, up from 297 the previous year. There were 336 Chapter 13 filings, up from 240 the year before, according to the Administrative Office of the U.S. Courts.

U.S. bankruptcy courts in Maryland and Virginia provided more recent figures. In Maryland, there were 982 Chapter 7 filings in April, up from 534 in April 2007. There were 625 Chapter 13 filings, up from 424. In the Eastern District of Virginia, which includes Northern Virginia, there were 1,191 Chapter 7 filings in April, more then double the number -- 581 -- this time last year. There were 552 Chapter 13 filings, up from 410.

Bob Arnold, 46, is waiting to find out whether the court will accept his Chapter 7 filing. He once made more than $100,000 a year as a manager at a printing plant. Then he lost his job, which wiped out his ability to pay child support and send money to about a dozen credit card companies, the lender for his timeshare and Capital One for his car. His monthly obligations totaled about $2,000, more than he takes in at his new job as a paralegal. He kept up his child support but stopped payments to other creditors. Then a friend, an attorney, suggested bankruptcy.

"I'm not happy about it, but I have to do what I have to do," the Centreville resident said. "I can't keep these creditors on hold, and I can't give them what I don't have."

Earlier this month, he sat in a hot, windowless room at the Legal Services of Northern Virginia's Falls Church Office as attorney Nancy Ryan explained how to file for bankruptcy. In the room were people with credit card debt, cars that had been repossessed, houses that had been foreclosed upon. "It's a tsunami," said Q. Russell Hatchl, pro bono coordinator for Legal Services.

Ryan reminded them that although a bankruptcy would take care of their debts, it could also leave them with damaged credit for as long as 10 years.

Lancaster knows that all too well. Although she is relieved that her monthly payments to her creditors will drop to $290 -- her car alone had cost her $400 a month -- she has felt the negative impact of filing for bankruptcy. She is trying to move closer to the District so she can get a better-paying job, but she cannot persuade any landlord to let her rent a place unless she hands over a lot of money up front. "It's hard to do anything once you get a bankruptcy," she said.

Ultimately, though, the bankruptcies will be restorative, said Morici, the economist. "It's better to get people a clean slate," he said, "so when the economy recovers they can participate again."