Bankruptcy Law Backfires Already

The Washington Post is reporting Bankruptcy Counseling Law Doesn't Deter Filings.

Three months after a new bankruptcy law took effect, the overwhelming majority of debtors seen by credit counseling agencies are filing for bankruptcy instead of using repayment plans envisioned by the law's supporters.

The law requires debtors to see credit counselors before they file for bankruptcy protection. It is a prerequisite that banks and credit card issuers hoped would steer consumers away from bankruptcy court and into plans that would allow them to repay debts over a few years.

But so far, that is not happening.

The counseling agencies say most debtors are in such deep financial trouble that they cannot qualify for a debt-management plan.

"Typically, consumers are too far gone when they get to us," said Ivan L. Hand Jr., president and chief executive of Money Management International Inc. (MMI), the nation's largest credit-counseling organization.

That was true during an afternoon spent with MMI credit counselor Lynn Cameron as she advised consumers from a small, gray cubicle in a 150-operator call center in Phoenix last month.

"Bankruptcy is about the only option," Cameron told a Colorado couple whose home was about to be foreclosed upon.

"It doesn't look like you have any alternative at this point," she said on her next call -- with a Maryland family of four with more than $59,000 in credit card debt.

"Bankruptcy looks like a very good option," she repeated an hour later to a disabled 60-year-old with no income and no assets but lots of debts.

In the first 13 weeks after the new law took effect Oct. 17, only 4.5 percent of the 14,907 debtors counseled by MMI had sufficient income to be considered for a plan to pay back debts over a few years. Of those 669 debtors, only 42 have signed up so far for such a debt-management plan.

Financial industry executives, who had pushed for the new law to reduce the record number of bankruptcy cases, say it is too early to tell how well the new credit-counseling requirement is working -- especially because so many consumers rushed to file under the old, less-restrictive law. In the two weeks before the new law took effect, more than 600,000 debtors filed for protection from creditors.

Previously, filings had averaged about 30,000 a week. The number dropped to about 3,600 a week right after the new law took effect, but is now about 5,000 a week and is expected to climb as holiday bills come due.

Credit-counseling executives expect the number of bankruptcy filings to pick up in the next few months, the traditional peak period for credit counseling, as families cope with increased energy prices, higher interest rates and a new federally mandated policy that boosts the minimum amount due on monthly credit card bills.

Key findings:

• Only 4.5 percent of the 14,907 debtors counseled by MMI had sufficient income to be considered for a plan to pay back debts over a few years. Of those 669 debtors, only 42 have signed up so far for such a debt-management plan.
• In the two weeks before the new law took effect, more than 600,000 debtors filed for protection from creditors.
• Previously, filings had averaged about 30,000 a week. The number dropped to about 3,600 a week right after the new law took effect, but is now about 5,000 a week and is expected to climb as holiday bills come due.

Let's see 42 out of 14,907 filings opted for debt management. That is a fine success ratio of .28%. Yes that decimal point is in the right place. The industry got what it wanted.

At the time I proposed it would backfire. The way to get around the means test is to be incredibly in debt and or lose a job and or be so far under that bankruptcy is the only option. That means test will likely ENSURE that those filing wait until they are damn sure they can not possibly meet the means test, racking up more bills in the meantime.

Those few that do opt into a pay back plan will be all the more careful to never rack up credit card debt again, barring of course a medical disaster or other emergency. This bill, designed to make people debt slaves forever, was doomed from the start.

Everyone seemed to expect bankruptcies to fall off a cliff after the October dealine under the old rules. Well the number initially plunged but comparing the rate to a period right after Katrina and right before a legal change is not exactly right. The important point is that it only took a few weeks for the rate to rise from 3,600 a week to 5,000 a week.

That is a lot of distress.
And I confidently predict it will get a lot worse too.
Following is just one reason:

The Orange County Register is reporting late property tax payments.

A yellow warning light is shining on the Orange County real estate market's dashboard. The number of delinquent property tax payments has reached the highest level in a decade.

This worrisome trend may be evidence that high purchase prices and burgeoning payments on popular adjustable mortgages as interest rates rise may finally be taking a toll on the budgets of local property homeowners.

Orange County's tax collector reports that:

Almost 46,000 property owners had not paid as of Jan. 7, a group that's grown 15 percent from the same time a year ago. It's also the largest count since the December 1995 bill.

These laggards - equal to 5.6 percent of all taxpayers - include residential and commercial property owners. Late payers owe $83 million to the county government- a sharp 35 percent jump in late bills from 2005. That overdue sum equals 4.3 percent of the total tax dollars owed.

The OC Register was a little more sanguine about those numbers than I am. With rising home prices homeowners had an option of taking out a line of credit or doing a cash out refi to pay taxes. Not any more. The gig is up, prices are falling and builders are offering massive reductions. Poof, entire neighborhoods are being repriced down by as much as $100,000 as noted in Centex "One Day" Sales.

Does anyone think those are "one day" sales?
Not me. Check out the Inman News January report card:

"There are now nearly 200,000 more unsold new homes under construction than there were just five years ago. Rapidly rising sales have masked the surge in construction. Most analysts focus on the months of new-home supply, which is shown below. Since hitting a low of 3.5 months of supply in the summer of 2003, this number has gradually increased to its current value of 4.9 months, its highest value since December 1996. While 4.9 months of supply is not concerning because the figure remains so low by historical standards, the months of supply calculation is held down by the high level of sales. If sales slow even a little, the months of supply figure will surge, as it did in 1990. The total number of unsold new homes is shown in the purple line below. There were 503,000 unsold new homes in November 2005, compared with 305,000 in November 2000."

Here is the lethal mix:

• Home inventory dramatically rising
• Home prices falling
• Credit standards tightening
• Interest rates still rising
• Global economy peaking
• Real wages falling

There is every reason to think that the tidal wave of bankruptcies is just beginning.

Mike Shedlock / Mish
http://globaleconomicanalysis.blogspot.com/