Bankruptcy filings up in Rock County
Tempered by a change in bankruptcy laws four years ago, personal bankruptcy filings in Rock County are on the rise again.
Driven by high unemployment and compounded by already high household debt burdens, local bankruptcy filings for the first seven months of this year are running 36 percent ahead of those filed from January through July 2008.
And a local attorney who specializes in bankruptcy filings thinks the worst is yet to come.
“When unemployment benefits end, we will see a larger increase in filings,” said Sandra Baner of Baner & Associates in Janesville.
Personal bankruptcies typically are filed under Chapter 7 or Chapter 13 of the U.S. Bankruptcy Code. The primary difference between the two is that a Chapter 7 case does not involve a repayment plan, while repayment is the core of a Chapter 13 filing.
Chapter 7 provides for the sale of a debtor’s nonexempt property and the distribution of the proceeds to creditors. Chapter 13 allows for the adjustment of the debts of an individual with regular income, allowing the debtor to keep property and pay debts over time, usually three to five years.
Baner said recent economic hardships in Rock County likely will fuel new bankruptcy filings.
Dwindling income is likely to affect people who filed Chapter 13 in the last few years. They filed repayment plans based on an income structure that in many cases has changed for the worse, she said.
“For most of my Chapter 13 clients that had filed before the hard times hit, they are now unable to make their plan payments, so they are making some tough choices,” Baner said.
Wherever possible, Baner is trying to help her clients extend their repayment plans to reduce monthly payments.
“In many cases, though, debtors are deciding to give up their homes and are converting their Chapter 13s to Chapter 7s,” she said. “If Chapter 13 plan payments don't get made, the Chapter 13 gets dismissed without the discharge of debts and most of these debtors end up refiling as Chapter 7s.”
Despite its unique economic situation, Rock County isn’t a bankruptcy island. For the first seven months of this year, personal bankruptcy filings were up 29 percent in U.S. Bankruptcy Court for the Western District of Wisconsin that covers Rock and all counties in the western half of the state.
Nationally, non-business filings for the six-month period ending June 30 were 35 percent above the first half of 2008, according to the American Bankruptcy Institute.
The total number of U.S. bankruptcies—business and non-business—filed during the first six months jumped 36 percent, and the number of total filings reached 711,550.
“The increase in filings through the first half of this year is a product of continued financial stresses weighing on both consumers and businesses,” said Samuel Gerdano, the institute’s executive director. “In this challenging economic environment, we expect bankruptcies to surge past 1.4 million by year end.”
Locally, personal bankruptcy filings peaked in 2005, the year President Bush and Congress passed a major reform of the bankruptcy system. In effect, the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 made it more difficult to file for bankruptcy under Chapter 7 because applicants now are required to meet eligibility requirements under a means test.
Under the test, monthly income is measured against median income. If the applicant’s income is below the threshold, he or she can file Chapter 7. If it’s above, he or she is more likely to be pushed toward Chapter 13 and establish repayment plans.
In addition, most applicants must undergo pre-filing credit counseling and then complete financial management courses before being discharged from bankruptcy, Baner said.
Baner said bankruptcy filings in 2005 spiked because of misinformation about the pending change in law.
“Some people heard that bankruptcy was going away, so if they were going to file, they had better file (in 2005),” she said.
Filings in 2006 likely were artificially low because people were under the impression that bankruptcy had either disappeared or become too difficult, she said.
“A lot of it was that because the rules changed, everything was so new and we were all trying to figure it out,” she said. “And it took some time before there was any case law established.”
Escalating credit card debt is another reason Baner believes bankruptcy filings will continue to increase. In tough economic times, consumers too easily turn to high-interest credit cards and payday lenders.
“I have had many clients lose hundreds or thousands of dollars to these places before they came to see me,” she said. “People become desperate when they believe they are going to lose their home, and I find that most people don’t understand what options they have or how much time they have.
“Too many people are threatened by their lender with the word ‘foreclosure’ and immediately move out of their home. It is sad.”