November 9, 2008 in City

More Americans are going bankrupt

Number of filings rising in Inland Northwest
By The Spokesman-Review
 

at a glance

Bankruptcy defined

The different kinds of bankruptcy, according to the American Bankruptcy Institute:

Chapter 7: Debts are liquidated; used by individuals or businesses

Chapter 13: A payment plan for individuals

Chapter 12: A payment plan for family farmers or fishermen

Chapter 11: A more complex reorganization for businesses, although it’s sometimes used by individuals with substantial debts or assets

Also today

A look at bankruptcy definitions and the rates of filings/A10

October was a scary month in more ways than one.

More people filed for bankruptcy – in the Inland Northwest and nationally – than in any month since laws governing the process changed in 2005.

In Coeur d’Alene, bankruptcy filings for October soared by 138 percent over the same month last year. In Spokane, filings were up 46 percent for last month alone – and by the end of this year, the number of Chapter 7 petitions for personal bankruptcies across Eastern Washington is projected to be 72 percent higher than last year. Nationally, bankruptcies are expected to pass 1 million.

“We’re opening 30, 40 files a month, which is like two a day, which is far more than we ever have in the past,” said David Eash, a longtime Spokane attorney specializing in bankruptcy. “Credit card debt seems to be coming home to roost. … People are losing their jobs or getting their hours cut back, and all of a sudden they’re finding their monthly payments on their credit card exceed their monthly income.”

Some homeowners are also finding themselves struggling to keep their houses, as adjustable rate mortgages get more expensive, home values decline and access to other sources of credit like second mortgages dries up. As foreclosure becomes a real possibility, homeowners look to bankruptcy.

“They’re saying, ‘I can’t afford the house anymore,’ ” said Lisa McBride, a bankruptcy attorney in Spokane.

In the federal bankruptcy court’s Eastern Washington district, total filings are projected to surpass 5,300 by the end of this year – an increase of 33 percent from last year. In the Idaho district, filings are running 35 percent ahead of 2007.

McBride said her client load has been similar to the big rush of bankruptcies filed in 2005. That year, filings soared before a new law took effect that tightened the rules for filing Chapter 7 bankruptcy – in which most debts are eliminated – and tried to move more bankruptcies into Chapter 13, which requires debt repayment. Although the overall number of filings remains below pre-2005 levels, it is Chapter 7 filings that are growing the fastest.

Among cases filed in Eastern Washington so far this year, 78 percent were Chapter 7.

“It’s been continually rising since mid-2007,” McBride said. “It’s been rising very steadily.”

‘Over the edge’

McBride said a lot of people with adjustable rate mortgages are finding it harder to keep up with their house payments. Many look to bankruptcy protection.

October was a peak month nationally, as the number of filings surpassed 100,000 for the first time since the law changed in 2005. Experts expect more than 1 million people to file for bankruptcy this year, with plummeting home values, tightening credit and a growing threat of foreclosures for many consumers.

“This underscores that the underlying economic problems of consumers who are facing high debts, flat incomes and now declining home values is a very powerful force that pushes people over the edge,” said Samuel Gerdano, executive director of the American Bankruptcy Institute.

Proposals to reform bankruptcy laws to make it easier for people to stay in their homes are expected to be introduced in Congress, and President-elect Barack Obama has supported the idea. The idea would be to allow judges to reduce mortgage debt on a bankruptcy filer’s primary home.

The vast majority of bankruptcies are filed by individuals, though business filings are on the rise as well. Eash said he’s seeing clients forced to shut their doors as customers are staying away.

“People are just not buying retail the way they have been in the past,” Eash said.

‘People are scared’

A key problem for people buried in debt is the changes being implemented by credit card companies, including raising rates and minimum payments, and lowering credit limits.

For people carrying high balances they can barely afford, the changes can be the last straw.

“They’re really forced into a bankruptcy situation,” said Jim Sindlinger, manager of the Spokane office of Debt Reduction Services, a nonprofit company that consolidates debts for clients. “That’s one of the biggest factors we’re seeing – credit card companies increasing rates, raising minimum payments, and people can no longer afford it.”

The tide of bankruptcies has been rising steadily for the past couple of years. In 2006, the typical number of Chapter 7 bankruptcy filings in the Coeur d’Alene office was less than 20 a month, according to court statistics. In 2007, the average month crept up into the 20s and 30s. So far this year, almost every month has been above 50 – and the last several months have more than doubled the year before. October’s peak was 72.

The increase isn’t quite as dramatic in Spokane, where October’s total of 203 filings was up 46 percent over last year. But month by month, 2008 has been running well ahead of the past couple of years, and observers say they expect it to keep increasing as the economy struggles.

“Everybody’s looking at the economy and people are getting scared,” McBride said. “This is as bad as it’s ever been – for most people – in their lifetime.”

USA Today contributed to this report. Shawn Vestal can be reached at (509) 459-5431 or shawnv@ spokesman.com.

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