Choosing Bankruptcy to Stay Afloat

from the Washington Post

Despite Tighter Rules, More Strapped Americans Seek Debt Relief

By Nancy Trejos

Danielle Lancaster makes $28,000 a year as a bank employee in Richmond. She owes almost twice that on her credit cards, student and car loans.

Add to that day-care expenses for her 2-year-old daughter, rent and utilities, and she uses up every cent she brings in. She has cut costs any way she can, suspending luxuries such as restaurant meals and movies. But that didn't stop her car from getting repossessed. "I work to live," she said. "I see my check, and it's gone right away."

Lancaster is 26 and bankrupt.

Two weeks ago, she filed for Chapter 13 bankruptcy protection, which will restructure her debt. She will have five years to pay it off under a plan that lowers her monthly payments. "Everything just got to be too much," said the Richmond resident who recently earned an undergraduate degree from Norfolk State University.

Despite the 2005 passage of a law that made it more difficult and expensive to file for personal bankruptcy, more Americans are choosing bankruptcy over destitution. Filings -- including Chapter 7, which wipes out debt, and Chapter 13, which reorganizes it -- totaled 822,590 last year, up 38 percent from 2006.

The numbers tell the story of a crippled economy, one in which people owe more than they can pay to their creditors -- be they credit card companies, mortgage lenders or auto and student loan servicers. And it's one more disturbing chapter in the saga of the subprime mortgage crisis, in which homeowners unable to handle higher interest payments on their adjustable rate mortgages are turning to bankruptcy to avoid foreclosure.

"The rise in bankruptcies is not about something that happened last week or last month," said Elizabeth Warren, a Harvard Law School professor and a bankruptcy expert. "It's about the fundamentals. It's about declining wages, rising costs, inadequate health insurance, job instability. More hardworking middle-class families simply can't make it in this economy, and it's only getting worse."

Bankruptcy attorneys and economists said the trend cuts across all segments of society -- the young and the old, homeowners with bad mortgages and renters, the poor and the middle class. In the past, bankruptcies were more common among people who had sudden life changes, such as a divorce, illness or job loss. Now, the bankrupt are people who have simply racked up too much debt.

"It is pretty widespread because there are widespread problems in the economy," said Peter Morici, an economist at the University of Maryland at College Park. "Americans have been spending 105 percent of their income for the last three or four years. That's not sustainable."

Declining home values are exacerbating the problem. No longer can people rely on the equity in their homes to pay down more expensive debt. Most troubling is that people are increasingly seeking bankruptcy protection to save their homes. Filing for Chapter 13 freezes a foreclosure and allows homeowners to negotiate more manageable payments with their lenders.

Take Jerome and Stephanie Smith. They used a fixed-rate mortgage to buy a house in Richmond in 2000, then refinanced to an adjustable rate loan in 2003. At least three more refinances followed -- Jerome Smith said he has lost count. The couple's monthly mortgage payment more than doubled to $1,600, excluding taxes and insurance. "I'm not dumb, but sometimes we do dumb things," Jerome Smith, 52, said.

Then something happened that had nothing to do with his judgment. He injured his back at his job as a machine operator. He has not worked since surgery in December and is getting $350 a week in disability payments, about one-third what he normally brings home.

The family -- the couple and their daughter -- had to go on what Jerome calls "the poor man's budget." That means buying a bag of 15 chicken legs and thighs, four boxes of macaroni and cheese for $1, three cans of green beans for $1, a big can of spaghetti and meatballs for $1.84, a 20-pound bag of rice for $5, some cereal, grits, eggs, bread, milk and juice. "You stick to that, and that comes under $100" a month, he said.

Still, the couple has not been able to keep up with the mortgage. One of three cars has been repossessed. The electric company has sent a cutoff notice. Phone service has been suspended.

Late and missed payments damaged their credit score so much that they couldn't get any lenders to refinance at more favorable terms. Then their mortgage company scheduled a foreclosure. Filing for Chapter 13 fended that off.

"There was nothing that I could really do," Jerome Smith said. "My hands were tied."

Congress recently considered a proposal by Sen. Richard J. Durbin (D-Ill.) to let bankruptcy judges cut interest rates and principal on troubled mortgages. But that plan was scuttled last month. Instead, consumers must operate under the law passed in 2005, which was intended to get people like the Smiths to choose other alternatives. In response to critics, such as credit card issuers who complained that people sought bankruptcy too frivolously, Congress enacted tighter income limits, tougher standards for measuring a debtor's ability to pay and mandatory credit counseling.

Personal bankruptcies reached a peak of 2.04 million that year as debtors rushed to file before the changes went to effect. The number dropped precipitously in 2006 but started climbing back up in 2007, according to the Administrative Office of the U.S. Courts.

In the District, there were 358 Chapter 7 filings in 2007, up from 297 the previous year. There were 336 Chapter 13 filings, up from 240 the year before, according to the Administrative Office of the U.S. Courts.

U.S. bankruptcy courts in Maryland and Virginia provided more recent figures. In Maryland, there were 982 Chapter 7 filings in April, up from 534 in April 2007. There were 625 Chapter 13 filings, up from 424. In the Eastern District of Virginia, which includes Northern Virginia, there were 1,191 Chapter 7 filings in April, more then double the number -- 581 -- this time last year. There were 552 Chapter 13 filings, up from 410.

Bob Arnold, 46, is waiting to find out whether the court will accept his Chapter 7 filing. He once made more than $100,000 a year as a manager at a printing plant. Then he lost his job, which wiped out his ability to pay child support and send money to about a dozen credit card companies, the lender for his timeshare and Capital One for his car. His monthly obligations totaled about $2,000, more than he takes in at his new job as a paralegal. He kept up his child support but stopped payments to other creditors. Then a friend, an attorney, suggested bankruptcy.

"I'm not happy about it, but I have to do what I have to do," the Centreville resident said. "I can't keep these creditors on hold, and I can't give them what I don't have."

Earlier this month, he sat in a hot, windowless room at the Legal Services of Northern Virginia's Falls Church Office as attorney Nancy Ryan explained how to file for bankruptcy. In the room were people with credit card debt, cars that had been repossessed, houses that had been foreclosed upon. "It's a tsunami," said Q. Russell Hatchl, pro bono coordinator for Legal Services.

Ryan reminded them that although a bankruptcy would take care of their debts, it could also leave them with damaged credit for as long as 10 years.

Lancaster knows that all too well. Although she is relieved that her monthly payments to her creditors will drop to $290 -- her car alone had cost her $400 a month -- she has felt the negative impact of filing for bankruptcy. She is trying to move closer to the District so she can get a better-paying job, but she cannot persuade any landlord to let her rent a place unless she hands over a lot of money up front. "It's hard to do anything once you get a bankruptcy," she said.