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Saturday, October 15, 2005

New Law Induces Big Increase in Bankruptcy Filings

The new bankruptcy law that takes effect on Monday law makes it more difficult and more costly for households to eliminate burdensome debt.  Bankruptcy and changes in bankruptcy law involve both human and economic costs, and there are important equity considerations to worry about as well. But as a passing note, the change in the law is going to make it much harder to asses the extent to which households are feeling the strain of the credit load they've assumed in recent years in the event of a slowdown in housing or economic activity more generally.  For example, even now, how much of the recent increase in bankruptcies over their normal level can be attributed to an increase in households with credit problems, and how much is due to households filing earlier than normal to avoid the stricter law? What should be defined as the normal level of bankruptcy after the change in the law to measure the actual numbers against given the number of people who file early and the change in filing behavior the new law will induce? This will make it harder to determine if households are beginning to face increased difficulties:

A Rush to Beat Bankruptcy Deadline Filings Spike on Last Weekday Before Tougher Law Takes Effect, by Terence O'Hara, Washington Post: ...bankruptcy court clerk offices around the region and the country yesterday overflowed with filers beating the deadline before tougher new bankruptcy rules take effect Monday. ... Charles Miller, division manager of the Alexandria court clerk's office, said ..."We were surprised by how well prepared the filers were in general," ... "They had done their homework. They just waited until the last minute." The line of filers stretched out of the clerk's office waiting room in the late afternoon. "It was wild ... at least wild for us," Miller said. The rush to file under existing bankruptcy rules was caused by passage this year of the Bankruptcy Abuse Prevention and Consumer Protection Act , which takes effect at midnight Sunday night. The law, long pushed by banks and consumer lending companies, is the most extensive change in the U.S. bankruptcy code in decades. It makes it harder for individual filers to erase debts by, among other things, requiring filers to go through credit counseling. Higher-income filers in many cases will be forced into Chapter 13 bankruptcies, which require repayment of a least a portion of debt. ... "The biggest change is that it increases dead-weight transaction cost of doing a bankruptcy," said Robert Weed, one of the most active bankruptcy lawyers in the Alexandria court. The new law has been a boon, at least temporarily, to Weed and other bankruptcy lawyers. ... He started turning away clients three weeks ago and had a goal of getting all his clients filed by Thursday. ... courts in New York City, Denver and other jurisdictions reported lines stretching out into streets. In Denver, 300 people were lined up to file by mid-morning. ... Burlingame, Calif.-based Lundquist Consulting Inc., which compiles bankruptcy statistics, said it expected 200,000 bankruptcy filings this week, far and away a weekly record. Typically, there are about 30,000 filings in a week...

Debtors Throng to Bankruptcy as Clock Ticks, By Eric Dash, NY Times: ...Through Oct. 8, consumers had filed more than 1.47 million bankruptcy petitions, a 19.4 percent increase over the same period in 2004, according to Lundquist Consulting, a company in Burlingame, Calif., that compiles bankruptcy statistics. Almost 103,000 petitions were filed in the first three days of this week alone. ... "We have never seen anything like this," said Barbara J. May, a consumer bankruptcy lawyer in St. Paul. "We knew it would be an upswing, but this is pandemonium."

Graphic from NY Times Showing the Change in Bankruptcies

    Posted by on Saturday, October 15, 2005 at 12:45 AM in Economics, Housing, Policy | Permalink  TrackBack (0)  Comments (3)

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