In today’s current economic climate, consumers who are struggling with overwhelming personal debt, job loss, and mortgage foreclosures are increasingly turning to bankruptcy protection, reports CNNMoney.com (“Consumer Bankruptcies Jump in 2008,” Jan. 6, 2008).

In 2008 alone, according to a report by the American Bankruptcy Institute, 1.06 million Americans filed for bankruptcy, up from 801,840 filings in 2007, an increase of 33 percent.

New Bankruptcy Law Temporarily Slows Filings

The annual totals for bankruptcy filings in 2007 and 2008, however, pale in comparison to the 2 million bankruptcies recorded in 2005, just prior to a new bankruptcy law that went into effect in October of that year, reports the Associated Press (“Consumer Bankruptcies Surge 33% in 2008,” Jan. 6, 2009).

The bankruptcy law, known as the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, made it more expensive and difficult for consumers to file for a Chapter 7 bankruptcy, and made it mandatory for consumers seeking a bankruptcy to take an income test that measures their ability to repay their debts.

Under the law, consumers who are deemed to have “sufficient” income — meaning they have incomes above their state’s median income level and can afford to repay at least $6,000 over a five-year period, — are required to file for a Chapter 13 bankruptcy, in which they work out a court-mandated repayment plan with creditors. Consumers who have income or assets that are “insufficient” can still file for a Chapter 7 bankruptcy that allows them to eliminate all of their debt obligations.

Although bankruptcy filings dropped 72 percent in 2006, shortly after the 2005 bankruptcy law went into effect, 2007 filings increased by 40 percent over 2006, and have continued to increase.

As Economy Worsens, Filings Expected to Rise

ABI Executive Director Samuel Gerdano said on today’s ongoing economic crisis, “Consumers are under great financial stress, with no immediate end in sight.”

“We expect the upward spike in personal bankruptcies to continue in 2009,” he added.

Henry Sommer of the Consumer Bankruptcy Assistance Project in Philadelphia says that as the recession worsens in 2009, more consumers will struggle to repay their debts. With banks tightening credit, many consumers will no longer be able to turn to their home equity and other lines of credit to help them pay off their debts.

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