Thursday, May 11, 2006

have nots still have less

It looks as if last year's reform law did not really stem the enormous flood of bankruptcies after all. Here are the states with the highest bankruptcy rates. By Liz Pulliam WestonThe lull in bankruptcy filings may already be a thing of the past.Consumer bankruptcy cases plunged to a 20-year low in the first three months of 2006, reflecting the passage of a tough new bankruptcy law last year. But the pace of new filings is already on the rise.Courts now see an average of 2,000 new filings a day -- four times the number that were filed in November 2005 after the bankruptcy law went into effect, according to Chris Lundquist, founder of Lundquist Consulting, which tracks bankruptcy trends. If filings continue to rise at anything like this rate -- which is not a given, but certainly a possibility -- we could see close to 1 million filings by the end of the year.
Credit card interestout of control?Find a lower rate.That would still be significantly less than the record filing levels that drove passage of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005. But it would be a pretty clear indication that the bankruptcy juggernaut was just stalled, not cured, by the new law.Flood hits credit counseling agenciesMeanwhile, the leading credit counseling organization says bankruptcy reform is putting unprecedented strain on counselors' finances.
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Bankruptcy filers are required to undergo credit counseling before they can proceed with their cases, but many arrive at the counselors in such sorry shape that they can't pay the nominal fee the agencies impose, said Bob Ensinger, marketing director for the National Foundation for Credit Counseling.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 to bankrupts 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 reformThe 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 wouldn't 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.
Highest bankruptcy rates, 2005
Households per consumer bankruptcy filing
National average
60.16The American Bankruptcy Institute survey ranked all 50 states and the District of Columbia.
Lowest bankruptcy rates, 2005
Households per consumer bankruptcy filing
South Carolina
District of Columbia
109.54The American Bankruptcy Institute survey ranked all 50 states and the District of Columbia.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 lull in filings after the law took effect -- Lundquist counted 102,949 filings in the first quarter, down 73% from the previous year -- was good news for those lenders. One measure of the industry's pain, Fitch Rating Service's credit card index for charge-offs, plunged from a peak of 7.52% in November to 3.29% in February 2006. Fitch analysts say they expect charge-offs for most mainstream issuers to remain below 6% for at least the first half of the year.Ominous indicatorsIf charge-offs and other delinquencies start to tick up, however, we could see the pace of bankruptcy filings quickly follow."I would look to things like more delinquencies on revolving credit as well as home mortgage delinquencies and foreclosures as pre-indicators, if you will," said Sam Gerdano, head of the American Bankruptcy Institute, who expects this year to end with about 900,000 consumer filings. But Gerdano says he believes last fall's filing rush "sucked so many cases out of the system that it will take quite a while to snap back."Consider, though, that the bankruptcy rate that so concerned Congress had averaged between 1.2 million to 1.6 million annual personal bankruptcies since the late 1990s. If we add 900,000 new filings this year to the 2 million last year, the average for the two years is 1.45 million. It's hard to see much progress in that.Lundquist thinks filings could easily return to 90% of the old rate, although the pace will depend on the long-term effects of the new law.
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Learn more about newsletters "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 bankruptciesThe factors that helped feed the bankruptcy boom of the last 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
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% which 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 column appears every Monday and Thursday, exclusively on MSN Money. She also answers reader questions in the Your Money message board.

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