Law Blog

It’s a common misconception that only the unemployed or unlucky have to file for bankruptcy. Now more than ever it is becoming apparent that bankruptcy can strike anyone.

Within the last 12 months, thousands of clients have come to LegalMatch.com seeking the advice of bankruptcy attorneys. These are the top fifteen reported occupations of those clients: 

Of this top 15, unemployed, retired, and disabled made up almost 50% of the total.  It shouldn’t come as much surprise that people unable to earn an income will have to file for bankruptcy. Other jobs are unsurprising as well: students will perpetually have student loan debt problems; realtors’ markets are always volatile; truck drivers and teachers simply aren’t paid a salary commensurate to their importance in society; and the self employed knew there was a risk when they decided to hang their own shingle.

Some jobs do raise an eyebrow however. Nurses, for instance, made U.S. News and World Report’s list of Top 30 Careers in 2008.

Regardless of the relative merits of the job, it harms us all when those who are disabled or those who have retired must file for bankruptcy. This is not an issue of compassion for people down on their financial luck; when people can’t pay their creditors, everyone in the food chain suffers. It may sound easy to simply blame the financial woes of the retired on poor planning, but how many of these people supposedly did everything right? They heeded the calls to invest, to have a portfolio, a 401K.  Unfortunately, so many of these once sound investments have lost tremendous value. (Or have been the victims of outright fraud.)

Those that question the wisdom of safety nets sometimes ignore the fact that these safety nets can act as an indirect “stimulus.” If a disabled worker gets SSI and can pay his bills and avoid bankruptcy, perhaps the bank that was relying on his cash has one less debt to worry about on its balance sheet. Instead of the money going from the treasury to the bank with everyone filing bankruptcy in-between (and loan markets drying up in the process), money goes from the citizen to the bank. The government still pays, but everyone else can pay their bills. (And the Feds don’t have to pay twice as much to clean up any mess.)

Safety nets, or “entitlements” as some would like to mischaracterize them, don’t just pay for the person who needs them. They help the system by helping people and banks alike avoid costly bankruptcy cases.  As we are witnessing, the ripple effects of a lot of people not being able to pay their bills costs all of us a whole lot of money.

As more and more people wind up in a credit crunch, more and more people are turning to debt consolidation as a possible way out. In the past 5 years thousands of customers have come to LegalMatch.com seeking debt consolidation attorneys.

Where are most of these cases happening? Not surprisingly, states with the highest populations have the highest numbers of cases: 

Only one state, New Jersey, managed to nudge its way past its rank of 11^th in population to 9^th place on the list. It beat out North Carolina, who does not appear on the list despite having almost 1 million more people.

California and Florida, however, seem to top other lists that are not so dependent on population. California and Florida are ranked 2^nd and 4^th  in the Nation in foreclosure rates, and also top LegalMatch’s list of states with the most disproportionate percentage of total national foreclosures to total national households. California and Florida are not alone in sharing some dubious distinctions, however: Ohio and Georgia make an appearance in another unfortunate top-ten list: top-ten highest bankruptcy rates.

All too often, one financial dilemma leads to another. Although debt consolidation does not consolidate mortgage debt, many debt consolidation programs require the debtor to take out a mortgage on their home. Although lowering monthly payments on credit card debt is important, putting up your home for a mortgage should always be considered a last resort. There is the possibility that the inordinately large number of foreclosures in California and Florida has something to do with their similarly high numbers of debt consolidation clients.

More analysis would be needed to see if a true correlation between foreclosure rates and debt consolidation statistics exist. Generally, where there is one financial dilemma, there are probably others, either in the past or looming on the horizon. The states hit hardest by this financial crisis will show high numbers of bankruptcy rates, foreclosure rates, and people with debt problems. Stay tuned for more information on where these numbers are coming from, and where they may be headed.

By filing for bankruptcy, a consumer is stating in legal terms that he cannot pay his creditors.  While creditors have the option of filing a bankruptcy petition against a consumer debtor, most bankruptcies are filed by the debtor.  According to the National Bankruptcy Research Center, 1,064,927 consumers filed for personal bankruptcy in 2008, a 33% increase from 2007.  Filings are expected to rise again in 2009 because the primary reasons for this trend – the sagging economy, housing crisis, and credit crunch – are not likely to be resolved in the near future. 

However, there were still fewer filings in 2008 than in 2005 and earlier, prior to the enactment of the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA).   The BAPCPA overhauled important parts of the Bankruptcy Code, and made it more difficult for consumers to file for Chapter 7 bankruptcy.  For instance, the BAPCPA requires debtors filing for Chapter 7 to wait eight years between filings, and the BAPCPA raised the asset and income requirements needed to qualify for Chapter 7.  Consumers bringing home incomes that exceed their state’s median income level, and who can pay at least $6,000 over five years must instead file for Chapter 13.  The new law pushed Chapter 13 filings up from 24% in 2005 to 41% in 2008.

What’s the difference between Chapter 7 and Chapter 13?  By filing for Chapter 7, an individual agrees to have his assets liquidated in order to pay creditors; in return, the debtor is able to discharge some of his debts.  Under Chapter 13, the debtor keeps ownership and possession of his assets, but agrees to pay some of his future income to creditors under a debt repayment schedule.

I looked at LegalMatch.com data from 2005 to 2008 to investigate these trends for myself.  In 2005, 74% of consumer clients wished to discharge all of their debts, while only 7% wished to repay them over time.  In 2006, 66% sought to discharge their debts completely, while 12% sought to make payments.  In 2007, 65% sought to discharge all debt, while 13% sought to repay.  And in 2008, 66% sought to discharge, while 11% opted to repay.  

In sum, it appears that the BAPCPA has been successful in prompted consumers to increasingly seek repayment (Chapter 13) over total discharge (Chapter 7).  However, the law’s goal of reducing overall findings is being somewhat thwarted by the tumultuous economic climate.

GM, Ford, and Chrysler are all clamoring to be next in line to receive billions of dollars of taxpayer money. Should they get it? If they don’t, will bankruptcy lead to the economic catastrophe recently forecasted by Big 3 executives on Capital Hill?

Absent a bailout, the Big 3 are looking at Chapter 11 bankruptcy. Chapter 11 is a corporation-specific type of bankruptcy that calls off the dogs and gives a company breathing room to restructure. In the case of the big 3 automakers, most experts agree that Chapter 11 bankruptcy would cut jobs, gut costly labor contracts with unions such as UAW, eliminate pension obligations to current and future retirees, and close unproductive factories.

Although shedding billions in health care costs, pension benefits, and operating costs might look good for a company’s balance sheet, the picture is not so rosy for everyone else. The UAW was a major supporter of President-elect Obama and will not be pleased if the democratic government they helped elect turns their back on them. Furthermore, where will they go for health care? Many-especially those who will inevitably lose their jobs-will go to Medicaid.

Then there are pension benefits. What happens when a company like GM can’t make its pension obligations? Under the Pension Benefit Guaranty Corporation, the federal government insures pension plans in the American auto industry; this agency is already $14 billion in debt.

Lastly, one of the most important parts of corporate restructuring under Chapter 11 is debtor-in-possession financing. This allows a bankrupt corporation to take loans to stay afloat, with the creditors of the needed capital jumping to the front of the claims line. With the economy in a tailspin and credit lines essentially non-existent however, economists like Nobel Prize winning Paul Krugman worry that no one will make any loans. No loans means no production; no production means this turns into a Chapter 7 liquidation.

No one wants to see what will happen if the big 3 simply cease to exist. Experts predict that the potential ripple effect would cost 2.5 million jobs in the various industries that depend on companies like GM. Many unemployed would inevitably end up in government unemployment lines.

There is no question that fundamental restructuring needs to be done. Some job loss and benefit cutting is inevitable. A bailout with strict conditions similar to a bankruptcy hearing, however, could prevent a far larger potential catastrophe. The government’s loan would operate similar to debtor in possession financing necessary to keep the production lines rolling and save millions of American jobs. Significant strings could be attached: the Big 3 would need to do major restructuring of their labor contracts, close unproductive plants, get rid of incompetent management, and make fundamental changes to their business model. Some creditors may need to take a significant pay cut or agree to restructure their claims. At the same time, some of the more horrific consequences of liquidation and massive unemployment would be avoided, and at a fraction of the cost to our economy should the big 3 all go bust.

Just like the original bailout, none of the options look good. Sometimes, however, you have to pick the lesser of two evils.