The deficiencies in our economy have clearly fueled home foreclosures and unemployment, but another statistic that’s on the rise in our troubled economic times is personal bankruptcy filings. This is noteworthy because new bankruptcy laws were enacted in October of 2005 to make it more difficult for consumers to simply abandon their debt.
According to the National Bankruptcy Research Center (NBKRC), last year saw an increase of personal bankruptcy filings of over 32% from 2008, with over 1.4 million bankruptcies filed. What’s most alarming is that more than at least two-thirds of those were Chapter 7 filings, which liquidates assets to pay off as many debts as possible before writing off whatever debts are left.
The 2005 bankruptcy laws were designed to push consumers to file for Chapter 13 bankruptcy which would force them to be responsible for their debts in exchange for keeping their assets. With more and more Americans losing their assets, their homes at the forefront of this, the new laws are generally considered ineffectual.
It’s Only Getting Worse
Comparing filings from the first quarter of 2009 to the first quarter of this year, there was an 18% increase in the number of people that filed for bankruptcy. If it were to stay at that modest rate of increase, end of year totals for consumers filing for bankruptcy would climb to almost 1.7 million Americans.
The report by the NBKRC also showed an increase in Chapter 7 filings rose to a substantial 75% of all of the March 2010 filings.
“The continuing decline in the share of Chapter 13 filings contrasts with the strong push by Congress in its 2005 bankruptcy legislation to encourage bankrupts to choose Chapter 13 rather than Chapter 7”
Are Home Foreclosures Undermining Bankruptcy Laws?
The government thought that if they made it tougher to absolve all of your debts, less Americans would file for Chapter 7 bankruptcy because they didn’t want to lose their assets, and most importantly, their homes. But if you take their homes away, what reason do they have not to liquidate whatever assets they have left and file for Chapter 7? None that I can think of.
According to RealtyTrac Inc. statistics the number of homes foreclosed on by banks rose 35% in the first quarter of 2010 from just a year ago. As long as these numbers continue to rise we have to believe that bankruptcies will follow suit.
The falling prices of homes are a major cause. While homes used to be Americans’ chief asset, almost 20% of homeowners owe more on their house than its actual worth, according to a Time article. And house prices have yet to bottom out. Many have seen the value of their homes plummet and are opting to walk away from their mortgage and have the house foreclosed on. The belief is that they’ll clean up their debts through credit repair or bankruptcy and simply buy another home in better financial times.
Without any major assets to worry about, Chapter 7 bankruptcy appears like a decent option to many. So these stringent bankruptcy laws are failing to produce their desired effect while our economy tries to right itself.
Even the major contributor to the NBKRC studies on bankruptcy feels that the laws were “largely ineffective.” Ronald Mann, a Columbia University law professor told the Wall Street Journal, “I don't think anybody who's knowledgeable about the bankruptcy system thought the statute was well crafted.”
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