Bankruptcies down nationally, but what about locally?

TRAVERSE CITY – If you just look at the numbers, 2006 was a "good" year for bankruptcy. According to the Administrative Office of the U.S. Courts, business bankruptcies across the country fell 20.1 percent while personal cases fell 37.9 percent in Fiscal Year (FY) 2006.

Now, the rest of the story. On Oct. 17, 2005, the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA) went into effect. Put simply, it was designed to reduce the number of people scamming the system, and reduce the number of filings.

Filings soar, then dip

Passage of the BAPCPA did two things to bankruptcy filings. First, it caused the number of filings to spike prior to the law's effective date. Second, it caused them to drop dramatically in the months afterward. Why the spike? According to local bankruptcy attorneys, the filing process was about to become considerably more difficult, and consequently more expensive, and there was a big rush to beat the law change.

National statistics from the Federal Judiciary show that filings began to rise in the last quarter of FY 2005 and peaked when over 600,000 petitions were filed in the first 16 days of October. Filings for that last quarter of '05 were more than triple (542,002) what they were for the same three months of FY 2006 (171,146).

That last quarter of FY 2006 capped a year of a "filings decline," but according to Traverse City attorney Paul Bare they are back on the rise, referring to a recent study presented in the Consumer Bankruptcy News. Bare's office does all bankruptcy work mostly on behalf of debtors. He says in the late 1990s the credit industry decided it was too easy to file bankruptcy and that the law was too lenient on debtors and lobbied hard for a change. When Congress eventually passed the BAPCPA, it was designed to tighten requirements and stop abuses.

However, "ninety-nine percent of the [bankruptcy abuse] cases were already being caught by the United States Trustee Program," said Jim Boyd, an attorney with Zimmerman, Kuhn, Darling, Boyd, Taylor and Quandt in Traverse City who serves as the Chapter 7 trustee for a western section of the state stretching from Ludington, through Grayling, and north to the Mackinac Bridge.

What's happening here?

From 2001 through 2004, the Western District of Michigan, which includes Grand Rapids, Kalamazoo, and the Upper Peninsula as well as Traverse City, averaged just under 16,000 bankruptcy filings a year, according to statistics from the American Bankruptcy Institute, and around 98 percent were consumer cases.

Of that 16,000, approximately 2,000 were from Traverse City and the surrounding area, said Boyd, and a typical yearly caseload for him was between 1,200 and 1,500. Then, filings jumped to 23,564 in 2005 in anticipation of the impending law change and Boyd's case load shot up to 2,000. In 2006, his case level dropped to 653.

"(But now) it appears that the numbers are trending upward, probably closer to 60-70 percent of the 1,200 to 1,500 cases that were filed from 2001-2004," Boyd said.

Local attorneys representing either the debtor or creditor perspective agree that the new law has created a lot more work for the debtors and their attorneys, and after experiencing a dip in activity in the first quarter of FY 2006, levels evened out.

Filing more difficult, BUT Locals still filing

While attorney Jill Rice acknowledges the increased burden on the debtor side of the equation, she does applaud the new protections for creditors that the BAPCPA provides. Rice, who works for Brandt, Fisher, Alward & Roy, handles creditor's rights in bankruptcy cases and highlighted the increased ability to get regular, monthly payments in Chapter 13 cases.

"We do see the amendments as a positive thing for creditors," Rice said. "We anticipated fewer bankruptcy filings altogether, but I don't think that is going to be the case," she added, noting how busy bankruptcy attorneys are in the area.

In FY 2006, attorney Paul Bare's office filed 12 to 15 Chapter 7 cases a month and five or six Chapter 13 petitions, which he described as a "fairly typical" caseload. What wasn't typical, however, was the time spent.

"It is a lot more work now to file a case," Bare said, and the fees have increased to compensate for it. The major downside of that, he added, is that it's a lot tougher for people to pay. A typical consumer bankruptcy filing costs between $1,400 and $1,600 (court filing fee plus attorney fees).

And because of new maximum income levels and other qualifications, more people have to pursue financial reorganization instead of straight bankruptcy.

"It's pushing more people into filing Chapter 13 (financial reorganization)," said Bare, who is seeing an increase in those filings as a result, but in mid-January also reported being "swamped" with Chapter 7 work as well.

Keith Leak, an attorney with Running, Wise and Ford, represents creditors on claims that come with both Chapter 7 and 13 filings. He said initially he saw more Chapter 13 filings in the first quarter of 2007, but now he is seeing a shift to more Chapter 7 cases.

"People who need to file are still filing," said Bare, who does almost all consumer cases. "They just need more money now."

Added Boyd, "The latest projections from the Justice Department are that by the end of 2007 the number of bankruptcy filings will be similar to what they were prior to the law change."

Why do people file?

According to bankruptcy attorney Paul Bare, the top reasons people enter bankruptcy are: divorce, medical (co-pays and loss of income), business failure and loss of job or job downsized.

The increases in business failure and loss of job or downsizing are reflective of the depressed state of Michigan's economy.

In this community, bankruptcies are almost 100 percent consumer or small business. Although there are often many factors, the region's high housing costs can quickly land someone in bankruptcy.

"Any change in status, and people could be in trouble," said Bare. BN