Personal Bankruptcy Surges 34 Percent

Loss of Jobs, Home Equity Drives Filings

Personal bankruptcy filings reached 1.25 million in the year ending June 30, up 34 percent from the year before, as Americans continued to grapple with debt, unemployment and devalued homes, according to figures released Thursday by the Administrative Office of the U.S. Courts.

Despite recent signs that the recession might be easing, the bankruptcy filings show that relief is still eluding many households. Several bankruptcy experts said that they expect the number of filings -- including Chapter 7, which wipes out some debt, and Chapter 13, which reorganizes it -- to reach a high not seen since 2005, when a new law making it more difficult to file set off a rush of personal bankruptcies. Indeed, 126,434 consumers filed for bankruptcy protection in July, the highest monthly total since the new law was implemented, according to the American Bankruptcy Institute. "This will be the biggest year since 2005," said Samuel J. Gerdano, the institute's executive director.

What's driving so many people to bankruptcy is the loss of jobs and home equity, experts said. Many Americans once had the luxury of refinancing their homes to pay off their debts. Now that home values have declined and jobs have become scarce, consumers are finding themselves with no choice but to face up to their creditors. And in many cases, those creditors are not making it easy. Credit card companies, for instance, have been raising interest rates and minimum monthly payments on many of their customers in anticipation of a new law that will restrict such practices.

"Most people, they've already tapped out their available equity or are literally underwater or upside down on a mortgage they can't afford and can't sustain," Gerdano said. "And if you layer on top of that high unemployment or underemployment, that creates a vulnerability in the household finances that makes people particularly susceptible to any unexpected life event."

Bankruptcy attorneys in the D.C. area said that the bankruptcies span all ages and ethnicities. Last year, Gary Greenblatt's law firm, Mehlman, Greenblatt and Hare in Baltimore, had 100 cases. So far this year, Greenblatt has seen 90 cases and expects to have a total of about 130 for the year. "The clientele we're experiencing really have not, from a consumer point of view, had an abusive credit history," he said. "But their circumstances have changed. Their incomes have decreased dramatically."

A Life Unraveled

Leslie Powell's life unraveled within a matter of months. First she lost her job. Then she lost her home. She was about to lose her car when she decided it was time to get help. In December, she turned to attorney Hong Park at Legal Aid Bureau in Maryland and declared Chapter 13 bankruptcy.

"There was nothing I could do," said the 40-year-old mother of two.

Her six months of unemployment had left her unable to pay her rent, forcing her and her children to move in with her mother. Even when she secured a new job registering patients in the emergency room of a hospital, she was still unable to dig herself out of debt. She was dodging her car lender and former landlord. "All of them came at once. Everyone would come after me," she said. "You don't know what to do, and then you feel sick."

She opted for Chapter 13 bankruptcy, which forces consumers to repay debts but allows them to keep certain assets, because it would keep her car from getting repossessed. Her attorney was able to negotiate a five-year repayment plan of her debts. She has since moved into her own place in Greenbelt. "You feel like you're starting over again," she said. "You don't have the stress of people calling you all the time, of not sleeping, of hating to go to your mailbox."

Personal bankruptcies reached a peak of 2.04 million in 2005 as debtors rushed to file before the new law went to effect. The number dropped sharply in 2006, mostly because the criteria for filing for a Chapter 7 bankruptcy became more stringent.

Bankruptcy experts say the noticeable increase in Chapter 7 filings in the past year is an indicator of how grim people's situations have become, because Chapter 7 forces consumers to sell off their assets and can leave an even longer blemish on credit records. The number of Chapter 7 filings for the year ending June 30 totaled 907,603, up 47 percent from the previous year. In that time, Chapter 13 filings rose 12 percent to 344,421.

'Spun Out of Control'

Henry Sommer, past president of the National Association of Consumer Bankruptcy Attorneys, said people had traditionally chosen to file for Chapter 13 to stave off foreclosure. But doing so does not decrease their monthly mortgage payments. Now that so many homeowners face higher interest rates and monthly payments on their adjustable-rate mortgages, they are giving up on their homes, he said. Instead, they are opting for Chapter 7 to take care of other forms of debt. "If your mortgage payment is an amount you can't afford going forward, then a Chapter 13 is not going to help you," Sommer said.

Tracy Brown, a 38-year-old mother of four who lives in the District, has opted for Chapter 7 bankruptcy. Over the course of 10 years, she racked up $40,000 in credit card debt. She has defaulted on one card. She had two cars repossessed.

"I grew up with a family with no financial management at all. Honestly, I didn't know any better," she said. "Everything spun out of control."

She is now taking responsibility for her financial mistakes and plans to file for bankruptcy protection next week. She is also moving her family into a smaller but cheaper two-bedroom apartment so she can save money. She plans to get the high school diploma she never earned. And she vows never to use credit cards again.