Bankruptcy Filings Reach Record High In 2005 - No End In Sight
One in every 53 households filed for bankruptcy protection in 2005, bringing total bankruptcy filings for the year to more than 2 million. That's a 31% increase over 2004 filings, which were already on the rise.
The increase was due in part to changes in bankruptcy law. In the days leading up to the change, half a million bankruptcy petitions were filed. That's about one-third the number that had been filed bankruptcy during the entire previous year.
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Blaming a last-minute scramble to file before the law took effect, though, ignores the bigger picture.
Solvent families who are able to pay their bills on time don't simply decide on filing bankruptcy because it's getting tougher to do so. The underlying issue is much more serious: Why is one in 53 U.S. households so close to financial collapse that filing bankruptcy is a necessary consideration?
Consumers crunched by rising gas prices and the accompanying increase in the price of retail goods, rising interest rates, and increased energy costs were struggling long before the bankruptcy law changes came into play.
While the more demanding process associated with the new law-and even the misconception that it would become 'impossible' to file for bankruptcy--might have created a sense of urgency in consumers already on the financial edge, the problem runs much deeper.
More Folks Filing Bankruptcy
Unfortunately, it looks as if relief is not in sight. Increased heating costs are already straining many winter budgets. Interest rates are projected to rise again at the end of January, in tandem with a mandated increase in minimum credit card payments.
As minimum payments increase and it becomes more difficult for consumers to keep current, late charges and over-the-limit fees aggravate the difficulties. In addition, the devastation of the natural disasters this fall hasn't yet been fully absorbed, and consumers who lost everything in the hurricanes will have to make hard decisions as they rebuild their lives.
Credit counseling agencies report a significant increase in business, but by the time consumers reach that stage it's often too late. Many embark on repayment plans only to discover that they ultimately have no choice but to file bankruptcy.
Fortunately, the 2005 bankruptcy reforms do not create the impossible hurdle that many consumers have been led to believe they do.
Although there are more steps in the process and a petitioner's finances are scrutinized more closely, the vast majority of people who would have filed for Chapter 7 bankruptcy under the old laws still qualify to do so.
And for many who don't qualify for Chapter 7, Chapter 13 bankruptcy reorganizations with reduced repayment over a limited period of time remain an option.
Bankruptcy filings have dropped off since the enactment of the reforms in October, but it remains to be seen whether that decline continues. Just as the increase in filings last fall was the result of a combination of factors, the current decline is likely the result of both the high concentration of filings in the fall and misconceptions among consumers about their current options.
Unless economic factors improve radically, it seems likely that bankruptcy filings will rise again as consumers are unable, despite their best efforts, to meet both increased living expenses and rising credit card payments.