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Bankruptcy filings have increased as the economy has soured. Chapter 7 filings are up 36.7% for the 12 months ended June 30, 2008 compared with the same period ending June, 2007. Ask any bankruptcy lawyer why, and you’ll hear same thing: the three main causes of bankruptcy are job loss, illness, and divorce.
Most families have reasonable levels of debt based on their income, even if the levels are high by historical standards. But with high and variable interest rates, and fees which are capriciously raised and imposed, payments may suddenly increase in cost if there is a hiccup.
Job loss is an obvious problem. If one member of a two-income family loses a job, the family can struggle on for a while. First they eat up their savings, then they start cutting credit card payments back to the minimum levels, and then stop paying altogether, as they try to hold on to their house. Eventually they fail.
Business failure is related to job loss. A person starts a business, goes into debt, and borrows more, and eats up savings in an effort to make it work. Banks require personal guarantees, so business failure means personal financial failure.
Illness is a huge problem. People without insurance can be ruined easily. Most people with insurance have policies with deductibles, and once those are met, most policies have a coinsurance requirement. The company pays 80% of the bill, leaving the sick person to pay the other 20%. That additional debt may be the cause of the payment hiccup. Even if an income earner doesn’t lose a job, hours may be reduced for some time, so the new debt has to be paid from lower income.
Divorce is a different problem. Suddenly there are two households instead of one, each of which owes the total debt. Their living expenses are higher, but the income is the same, and some can’t make it.
Not every family under stress will have to file bankruptcy. Many families have low debt, and savings. If you have a house and a car with reasonable fixed payments, you can survive for some time before you feel financial stress. But families with low savings and relatively high debt levels, especially if the interest rates are subject to upward adjustment, are more likely to fail in the event of job loss, divorce or illness.
The problem is going to get worse. This chart shows that average household debt has been rising steadily, but that the rate of increase went up beginning in 2000. At the same time, household savings have been falling across the period, until it just can’t get much lower.
One indication of the stress this creates on households is the increase in the debt service ratio, an estimate of the percentage of disposable income required to make the payments on mortgage and consumer debt. From 1980 to 1999, the DSR averaged 11.5%. Since 2000, the average is 13.7%, an increase of about 19%. These figures and those in the preceding paragraph are based on averages. They do not take into account the large number of people who have no consumer debt, and those with no mortgage, either because they rent, or because they own their own homes, so the numbers for a lot of people are even worse.
This dry description doesn’t touch the reality. Every day I deal with these problems, and three or four times a month, I sit in on meetings of creditors in Chapter 13 and Chapter 7 cases. I see 52 year old men with heads bowed, hands clenched, unable to answer the Trustee’s questions, forced to let their wives do the talking. Businessmen come to see me with their dreams in tatters, unable to sleep, so depressed that amateurs can make the diagnosis, blaming themselves for the problem, shamed into silence with their spouses, embarrassed before their kids.
We sometimes call bankruptcy financial baptism, because it gives people a new financial life. I’m glad I can help the people who come to see me.
23 Comments
Thank you masaccio for the stories of how people come in, humbled, to see if there can be any hope for them. A great many people will find themselves in bankruptcy before this economic cycle is over. We need to be aware of the enormous human cost. Please write again for us.
Seconded.
digg
Painful to see the media be so harsh on people going through bankruptcy. For most people this is an event that is a last resort after trying so many other possibilities. I watched a close friend go through it – thank goodness this exists, even in the sad form left to us by Congress.
The 2005 amendments were especially hard on our pro bono clients. Many of the big firms quit providing bankruptcy services for the poorest among us because it increased their risk too much.
There are going to be a whole lot more bankruptcies in the coming months/years before it gets better.
I wish my bankruptcy were providing me with a “new life” but until my mortgage company is dealt with and they are forced to provide my true payment history, and the kabosh is put on the fees that they dream up and charge relentlessly, my bankruptcy will not help me. It simply puts off the inevitable foreclosure that will come when they say I still owe 8,000$ at the end of my chapter 13, despite the fact that i have paid my payment every single month, and never missed a payment through the bankruptcy court. Until someone stops these people, the problem will not go away for some of us. I have a year and a half of protection, and then they can begin their loan sharking again. And…I can’t find a mortgage to save my life because “they” say I owe so much money in these illegal fees that I have no equity AND their behavior forced a bankruptcy in order to save my home. (4 kids and a dog, single mom, a block away from elementary school and highschool).
I pray that Obama does something to help us and to stop them from continually violating the law. MY bankruptcy judge says he can’t help me and that he cannot intervene on the fees. We can sue for my payment history but so far, they have failed to provide it.
I was thinking of you when I provided the link to the Katherine Porter article linked on the word “capriciously”. Porter did a study of the mortgage servicing industry and the way it imposes unreasonable and unfair costs on homeowners, and it is really stunning. This industry is failing at its basic task.
I filed bankruptcy in March> I got divorced in January 2006 using mediation instead of going through courts. After our divorce was finalized, my ex presented me with a fully maxed out credit card bill in my name, a card I never knew we had. Granted I was too trusting in going through mediation, I should have demanded a credit history on her but the card was in my name.
I had been receiving bills that didn’t seem familiar to me and when i asked her she was like “Oh yeah, there’s a card i got while we were married. I could have gone to court to nullify the property settlement but in the interim late charges and accrued interest had accumulated to the point where minimum monthly payments were $2000 a month.
I called the issuer (Chase) to explain and try to work out something with them but the woman on the other end didn’t want to hear anything. She said I could call a finance company they worked with which would probably give me a loan to pay off the debt. I resisted and she said they’d have to sue me. i said what if I declare bankruptcy and the woman had the nerve to actually laugh at me over the phone. “Go ahead,” she said. “People in your financial situation cannot qualify for Chapter 7 any more. We’ll wind up getting the payments through a judge one way or the other.”
The next morning I was served with a summons for Supreme Court in Orange County NY. I called my attorney and we sat down to go over my finances. he figured I would meet the means test and would be able to file under chapter 7 and he was right, but I just barely qualified.
Families who make the median income or more in their area cannot file chapter 7 and wind up going through chapter 13 which means they have to pay off their debts within 5 years. If I wasn’t able to write down my income through disability payments and child support payments, i would have been screwed.
This is what the Democrats in congress did for use by voting for that heinous “reform” law.
Good luck
Jesus H. fucking Christ, where is the cry to amend the Bankruptcy Code so that consumers can get discharged from unsecured debt as they did for a century or more until they fucked up the Code in 1994? Blow off most of that unsecured debt, a lot of consumers will be able to keep their houses.
Should we be trying to seek better bankruptcy legislation from the Obama administration? What form would that take?
Thanks for your guidance masaccio.
Bankruptcy reform is low on the list of issues for the new crowd. We will have to work with the Blue Dogs on this, because they were staunchly in favor of the 2005 amendments. I think some minds have been changed as we see how it really works.
Meanwhile, nothing happens to the financial predators on Wall Street who created these problems in the first place. Oh, I forgot. THEY got their criminal asses bailed out by the gubmint.
Sorry but too funny:
She’s been driving batty this last year, but
her 22 year-old internPelosi does seem to have a good sense of humor.http://www.youtube.com/watch?v=wtOW1CxHvNY
(rickrolls right out of the gate)
Treasury nominee failed to pay personal taxes
A little vetting problem for Treasury secretary designee Timothy Geithner.
Can we have Krugman instead?
or stiglitz or galbraith or baker?
Would it be cheaper to completely forgive the payments and allow people to remain in their homes?
Or would it be cheaper to provide everyone with Section 8 rental apartments/houses? There aren’t enough now!
Forgive the payments, keep people in their homes. I
I see very few Section 8 rentals in my area and they used to take up quite a bit of the For Rent want ads.
My Father-in-Law, a very successful Republican corporate type, asked me once what I thought of personel bankruptcy. I told him that it was a business decision. He had no idea what I was taking about. I told him that if you apply the same thought process to your personal decisions about bankruptcy as a corporation would, you would see it as a purely business decision. Our society has retained the stigma against personal bankruptcy, but has removed it for business. Corporate executives whose firms went bankrupt used to commit suicide or disappearor at least be unemployable. Now they are given bonuses even if their decisions destroy the lives of thousands of workers. There no longer is any Social Contract in this regard. Therefore, why should an individual approach bankruptcy any differently. Yes it means that their credit will be screwed for a few years, but that can be a good thing. I don’t think financial baptism is an appropriate metaphor any longer, given the value judgements the phrase contains. If their are no moral barriers for business, why should they exist for individuals.
The stigma may be gone for some people, but I can tell you that many of the people who file are ashamed to do so. For them, it is a new beginning, once they bring themselves to see the necessity of filing.
I probably wasn’t clear on this. I realize that many people including many business-people feel the the stigma, and for them it is an extremely difficult decision. For the individual, in most cases bankruptcy equals failure. There is a lot of painful emotional baggage that accompanies failure. I went through it myself thirty years ago when I foolishly got into the restaurant business. I understand the emotions surrounding failing myself, my family and my community. Many of the creditors that I had to list had been friends for many years and I lived in a small community where everyone knew all about you. I have had a long time to process what happened. While I paid a personal, financial and social price for my failure, I have have watched over the years as the penalty for corporate executives has been reduced or removed. Why should an individual debtor be subjected to shame when the corporate executive is not. Is a corporation a superior form of personhood? That is how I came to the conclusion that it is strictly a business decision. It sounds cold, but that is where society has gone once the social contract was discarded.
That is a very insightful comment, I agree, and thanks.
I am probably going to hit that wall sometime this year. Divorced 5 years ago I was just getting by until they gouged us on oil which made food and everything else go up. That created havoc with the rest of my bills and now I am behind on my house taxes and slow to pay on oil and water. I have kept up at least minimums on my credit cards which have had to be used on oil and car repair, etc., but in December I missed a payment on one, not purposely, but I was very sick and under a lot of stress to get to work and do something, no matter how small, for Christmas. I called the card when I got the notice in the mail (for I really did not realize I hadn’t paid it) and I had to go through 3 different people who gave me three different answers and all were very rude. (This is a card I was never late on – ever). In the fall I called another card asking them to work with me and reduce my rate which they had bumped up to 29%. I told them I wanted to continue to pay them, but c’mon, I had been late once (by 1 day) in the year and they jumped to the max. The rep I spoke to said, no, you can’t get your rate reduced unless we see 6 months of on time payments. So I asked for her supervisor, since the payment I was 1 day late on was for several thousand dollars. She told me “no, you aren’t qualified to speak to them”. Quote! WTF?
I was raised to be very conscientious and if I have to declare bankruptcy it will be very painful. I don’t want to, but sometimes when I look around at all the people who are walking away from their bills and seeing all of the financial predators out there I think, why am I being a sap? I don’t go out to eat or to entertainment, my house is in need of tons of repair (but at least I have a roof over my head), the heat is kept very low, I sold all my jewelry, I don’t buy new clothes, we are existing. And that’s okay, I can handle all of that. But when 100 gallons of heating oil costs $414 (in August), more than I take home in a week and apples are $2 a pound and you are swamped with a $752 repair bill for the car you need to get back and forth to work because there is no public transit in your area and your 29 year old roof starts to leak…I don’t know what else to do. Keeping a roof over my family’s head is paramount but my young adult children don’t have health insurance (should have universal health care, but that’s another topic) and we all still need to eat. (and yes, they contribute, but they have school, insurance and gas expenses of their own).
I am waiting awhile to see if Obama and this congress make the bankruptcy laws less punishing, but I don’t know how long I can hang in there.
I’m sorry about your situation. Bankruptcy might help. Good luck.