Bankruptcy Filings on Record Pace
Bankruptcy filings by consumers and businesses surged 25% in the second quarter from a year ago -- putting them on track to surpass the record-breaking year of 1998, when 1.4 million cases were filed.
''The figures for the first half of this year are alarming, if not shocking,'' says Samuel Gerdano, executive director of the American Bankruptcy Institute, a non-profit, non-partisan educational group.
During the 3 months ended June 30, bankruptcy filings increased to 400,394, according to data from the Administrative Office of the U.S. Courts.
Chapter 7 bankruptcy filings jumped 30% in the period, accounting for 293,228 of the new filings. Chapter 7 is the most popular form of personal bankruptcy, in which most unsecured debts are wiped out.
Experts believe some of the increase may be because of fears that Congress soon will enact legislation that will make it much harder to file for Chapter 7 bankruptcy.
Supporters of the effort to reform the bankruptcy code say that it is necessary to curb abuse of the system by people who use bankruptcy to get out of paying bills they could actually afford to repay.
But critics say most people who file for bankruptcy are in legitimate need of relief -- often overwhelmed by debts that stem from job loss, divorce or a medical emergency.
The House and Senate already have passed separate bankruptcy reform bills, but they must still go to a conference committee to reconcile their differences.
Committee members are expected to begin working on a compromise when Congress returns in September. The legislation is scheduled to take effect 6 months after it is enacted.
The increase in business bankruptcies also is taking a financial toll on families. ''If a company liquidates, then people lose jobs,'' Gerdano says. Many don't have a financial cushion.
In fact, the total debt-to-income ratio for U.S. consumers has increased steadily over the past two decades. In 1981, each U.S. adult had, on average, 1.14 times as much debt as income, according to SMR Research in Hackettstown, N.J. By 2000, debt had ballooned so that each adult had 1.63 times as much debt as income.
As the economy softens, and layoffs increase, more families will be living on the financial edge. SMR calculates that 43.7 million U.S. households have less than $1,000 in liquid assets and 16.3 million households have zero or negative net worth.
''Part of the economic boom of the 1990s was that people were spending and acquiring things and not saving,'' Gerdano says. ''Most people are just a handful of paychecks away from needing to seriously think about seeking bankruptcy relief.''
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