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Letter to the editor

Economy fuels bankruptcies

Filings surge as payments overwhelm debtors.

By HELEN HUNTLEY, Personal Finance Editor
Published November 13, 2007

As the rest of the economy slows, the bankruptcy business is booming. Both nationally and in the Tampa Bay area, bankruptcy filings are at their highest level since the law changed two years ago.

October filings in the middle district of Florida, which includes Tampa Bay, were up 26 percent over September and 88 percent over October 2006. This year's filings surpassed last year's total before the end of August.

Two reasons stand out:

- Mortgage and housing woes.

- Greater awareness of bankruptcy's availability.

"Adjustable-rate mortgages created a huge mess for a lot of people," said Clearwater bankruptcy lawyer Jay Weller. Low teaser rates that attracted home buyers have begun to reset, with monthly payments rising as higher interest rates kick in. Higher property insurance premiums and real estate taxes have compounded the problem.

Instead of trying to keep their homes as they go through bankruptcy, more of his clients are giving them up, Weller said. "They're surrendering their houses because they just can't afford the house payment anymore."

Declining home values and tighter lending standards mean many people don't have the option of refinancing; either they owe more than their home is worth or they can't qualify for the loan - or both. The same issues have cut off access to home equity loans for many homeowners.

"A lot of people were living off the equity in their houses during the last five years," said U.S. Bankruptcy Judge Michael Williamson. "It was funding a lot of consumer spending and credit cards were being paid out of mortgages. That's over now. In some cases they still have the credit card debt and now they can't use the mortgage to pay it."

Bankruptcy filings soared two years ago as debt-burdened consumers rushed to get in their filings before changes in the bankruptcy law took effect. "Last chance" advertising by bankruptcy lawyers fueled the frenzy.

There were some important changes. It's now tougher for people with above-average incomes to walk away from their debts, which means if they want bankruptcy protection from creditors, they have to go through five-year debt repayment plans.

Bankruptcy also became more complicated - more forms and credit counseling are required - and more debts are now classified as nondischargeable.

Weller said the change that has had the biggest impact on his clients is a requirement that people with newer cars pay the full amount of the loan if they want to keep the car, even if the car is now worth less. Under the old law, the excess debt could be wiped out.

However, Congress didn't eliminate bankruptcy, which is the impression some people got.

"There was a lot of misinformation out there," Williamson said. "People are now realizing that bankruptcy still is as available as it ever was."

Monthly filings are now about half what they were before the law changed. A larger proportion, though not a larger number, are Chapter 13 repayment plans.

Weller said he expects filings to continue to increase.

"Changing the law doesn't change the situation of the average person," he said. "The average working person's wages are stagnant while costs are going up continually."

Helen Huntley can be reached at hhuntley@sptimes.com or (727) 893-8230.

[Last modified November 12, 2007, 23:01:28]