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Sunday, February 07, 2010
Boom Times for Bankruptcy
By Richard Metcalf
Journal Staff Writer
Bankruptcies took another big leap in 2009, surpassing the 6,000 mark for the first time in four years in New Mexico.
There were 6,129 bankruptcy filings statewide in 2009, a 34 percent increase over the 4,581 filings in 2008, according to the latest statistics. Nine out of every 10 bankruptcies in the state are filed for a Chapter 7 liquidation, where most or all debt is erased.
Driving forces behind the increase in bankruptcies are high unemployment or underemployment and eroded real estate values, according to local bankruptcy experts. And it's likely to get worse in the coming year.
"Some of the impacts of the recession are just beginning to hit us now," said Norman H. Meyer Jr., clerk of the U.S. Bankruptcy Court in New Mexico, who expects filings to jump another 22 percent to 7,500 by the end of this year.
By the end of 2011, Albuquerque bankruptcy attorney Jerry Velarde predicts filings will reach 9,500, which was the average number of bankruptcies filed between 2002 and 2004. Many observers believe 9,500 bankruptcies a year is a "normal" level for New Mexico.
The bankruptcy world was turned on its head in 2005, when the Bankruptcy Abuse Prevention and Consumer Protection Act went into effect. An extensive and complicated overhaul of bankruptcy law, the act triggered a tsunami of filings both here and around the country in 2005 followed by a 20-year-low trickle of filings in 2006.
A record 12,424 bankruptcies were filed in the state during 2005 to beat the act's implementation, followed by a mere 2,519 bankruptcies in 2006.
Since then, filings have gone up by roughly one-third a year. Last year's total is a little higher than the 5,882 filings in 1996. Nationwide, the 1.4 million bankruptcy filings in 2009 are roughly at the level of 1998.
Credit card debt
A mountain of credit card debt is a common thread among most consumer bankruptcies, although Meyer noted, "It's often an echo of the real reason."
Job loss is the most common reason for a consumer bankruptcy, although there's usually a long period of financial distress between the job loss and bankruptcy filing. Because of the lag, Velarde said, "You're looking at bankruptcy numbers that don't reflect today's economic conditions."
A Chapter 7 liquidation is by far the most common form of bankruptcy in New Mexico for several reasons. The biggest reason is that a Chapter 7 filing is usually in the best interests of the consumer, said Bill Davis, an Albuquerque bankruptcy attorney.
Although the term "liquidation" sounds bad, consumers going through Chapter 7 normally keep their personal belongings, including their car and house if current on payments. The court will look at the filer's assets for extra things that can be seized or sold to repay debt, but in the vast majority of Chapter 7 cases in New Mexico, nothing is seized or sold.
The alternative is for a consumer to file a Chapter 13 bankruptcy, where an attempt is made to repay at least some of the debt over three to five years. Sometimes, the consumer can't keep up with their debt payments and winds up converting to a Chapter 7. Even in a successful Chapter 13, the consumer still has a bankruptcy on his or her credit report for 10 years.
The Bankruptcy Abuse Prevention and Consumer Protection Act includes a "means test," which was designed to steer more bankruptcy filers into a Chapter 13 with the goal of having more outstanding debt paid off.
A key element in the means test is the use of median income as a cut-off point. The act says if a bankruptcy filer makes more than the median income — $36,773 a year for a single wage-earner in New Mexico — then he or she would be ineligible for a Chapter 7 under most circumstances.
The means test has had no effect on Chapter 13 filings in New Mexico. The main reason is that most people who file for bankruptcy in the state have a lot of bills and not much income, at least not enough to exceed the median. Thus, they qualify for a Chapter 7 liquidation.
Defaults and foreclosures
Real estate defaults and foreclosures are showing up in an increasing number of bankruptcy cases.
Some involve homeowners who have fallen behind on mortgage payments, often because of a layoff or reduction in work hours. Irvine, Calif.-based RealtyTrac reported 7,212 houses went into the foreclosure process in New Mexico during 2009, almost double the number in 2008.
There are both government and private sector mortgage modification programs out there, but Albuquerque bankruptcy attorney Dave Giddens said he currently has four clients who attempted unsuccessfully to use them.
"It's generally a runaround," he said. "I have seen a zero success rate."
A small but growing number of bankruptcy cases involve small-time investors who bought residential or commercial properties during the real estate boom of the mid 2000s. Their strategy was to pay the mortgage through rental income, then cash in on the rising value at a later date. The strategy fell to pieces when the properties didn't rent and values dropped.
Nationwide, speculators account for about one-third of all home foreclosures, according to both RealtyTrac and the Mortgage Bankers Association.
A trend is emerging of property owners fighting back when faced with a foreclosure action, Giddens said. Some are filing counterclaims against their lenders over what the owners believe are unfair and deceptive loans.
The trend appears to be part of a much broader disillusionment among consumers with financial institutions and the government.
"One in three people who come in to see me say, '(The federal government) will bail out the big banks, but they don't have a penny for me,'" Velarde said.
Credit card companies are also targets of consumer backlash in bankruptcies.
"I guarantee some people do not feel guilty or saddened about not being able to pay their credit card debt," Davis said. "In a way, they feel vindicated. There's no embarrassment in sticking it to the credit card company."
Breakdown of 2009 bankruptcy filings in New Mexico:
• 5,615 Chapter 7 filings, up 36 percent from 2008. Most if not all debt is erased in a Chapter 7 bankruptcy.
• 460 Chapter 13 filings, up 7 percent from 2008. In Chapter 13 filings, an attempt is made to pay off at least some of the debt.
• 49 Chapter 11 filings, up 44 percent from 2008. Chapter 11 filings are similar to 13s, except they involve businesses or high net-worth individuals.
• Four Chapter 12 filings, up from three in 2008. Chapter 12 filings involve financially distressed family farmers.
• One Chapter 9 filing, compared to zero in 2009. Chapter 9 filings involve government entities.
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