Bankruptcy Trends: A Perfect Storm of Debt

The TimesFreePress is reporting Boomers look to bankruptcy system for relief.

"People are getting squeezed," said Mr. Young, [a bankruptcy lawyer] who has practiced in Chattanooga for almost 30 years. "A lot of baby boomers are seeing incredible debt loads. All the sudden you're just keeping your mouth above water to keep from drowning."

Competing financial obligations to parents and children, health care costs, mortgage debt and inadequate retirement planning are all adding up for many older Americans who opt for bankruptcy, said some Chattanooga bankruptcy lawyers and credit counselors.

Their perceptions are echoed in a recent study by John Golmant and Tom Ulrich, researchers at the Administrative Office of the U.S. Courts, which found that older Americans are filing for bankruptcy at faster rate than the general population.

The number of bankruptcy petitioners over the age of 45 increased from 27 percent of all filers in 1994 to 39 percent of filers in 2002, according to the study published in the May 2007 issue of American Bankruptcy Institute.

Conversely, the percentage of filers under 25 years old decreased from 10.6 percent to 4.2 percent of all filers in the same period.

The fastest growth occurred in the percentage of petitioners over the age of 55, which increased by nearly 46 percent from 1994 to 2002, though the age grouping still comprised only 14 percent of all filers in 2002.

Credit card debt is often the immediate cause of bankruptcy filings, but many of these debtors are using credit cards as a life-line to pay for prescriptions and high insurance deductibles, said Lois R. Lupica, professor at University of Maine School of Law and resident scholar at American Bankruptcy Institute.

"People don't have the money, so they use the credit cards," she said. "The increasing credit card debt can be a deceptive cause of people filing for bankruptcy, until you look behind what's being charged. The underlying causes have not been addressed."

Kyle Weems, a Chattanooga bankruptcy attorney, said, "We've filed many more boomer (bankruptcy) cases recently because of health problems. They have a lot of problems with coverage until they get to Medicare. There's that gap from 50 to 65."

Bankruptcy filing rates in Chattanooga and nationwide have fluctuated in recent years, due to bankruptcy law reform.

The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 made it more complicated and more expensive to file for bankruptcy, and required debtors to receive credit counseling before and after filing. Bankruptcies nationwide surged before its passage in October of 2005 and dropped steeply in the months following.

Bankruptcy rates in Chattanooga also dipped significantly in 2006, but now the numbers appear to be bouncing back. In the first three months of 2007, 1,259 people in Chattanooga filed for bankruptcy, compared to 917 in the same period of 2006, according to the Eastern District of Tennessee Bankruptcy Court.

Tracy Johnson, education specialist with the Consumer Credit Counseling Service in Chattanooga, said, "I don't want to say the (reform) law didn't work, but what the law was intended to do was make people come to a legitimate credit counseling agency and learn their alternatives before they went bankrupt."

Mr. Young said there is hope for breaking the cycle of financial illiteracy and indebtedness.

"I think some of the young people are starting to see the faults of the baby boomer generation and the mistakes of their parents," he said. "The cycle is only going to be broken with the true education of people in their teens and twenties and I think that's slowly starting to turn around."

"I don't want to say the (reform) law didn't work, but what the law was intended to do was make people come to a legitimate credit counseling agency and learn their alternatives before they went bankrupt."

Does anyone think that the intent of the law was anything other than to make people debt slaves forever? It's pretty easy to extend credit at high interest rates if you think chapter 7 bankruptcy will be removed as an option. Remember when there used to be credit redlining? Now credit companies go out of their way to solicit those with the worst credit history.

But the law backfired once already with a massive number of filings ahead of bankruptcy reform bill enactment and rates are starting to tick back up again. Since boomers are getting older, people are living longer, and health care costs are soaring I guess this trend should be expected.

Here are a few snips from the American Bankruptcy Institute about the study.

A recent study reveals that bankruptcy filings by older Americans age 55 and over are increasing at a faster rate than the general population. John Golmant and Tom Ulrich, researchers at the Administrative Office of the U.S. Courts, conducted their study by comparing chapter 7 and 13 consumer filing data from 1994 and 2002 to examine how age demographics affect bankruptcy filings. The results of the study are summarized in their article titled “Aging and Bankruptcy: The Baby Boomers Meet Up at Bankruptcy Court,” published in the May 2007 issue of the American Bankruptcy Institute Journal.

In conducting their research, Golmant and Ulrich looked to determine the proportion of bankruptcy petitioners that fall within particular age categories and whether these proportions have changed over time. While previous demographic studies primarily relied on survey data to find out more about the filing rates of different age groups, the researchers evaluated actual data from courts and public records available through outside resources.

The study concludes that a number of factors are behind the rising “Baby Boomer” bankruptcy filing rate. Golmant and Ulrich point to the growing amount of mortgage debt carried by older Americans as they tap into their home equity, and rising health care costs as primary reasons behind the growing bankruptcy rate for those 55 years of age and older. Facing reduced income in retirement and escalating health care costs, the researchers said they expect that the increasing bankruptcy filing rates for older Americans will persist into the foreseeable future.

There are numerous articles on the internet referencing this story but no one yet has asked the big question that is on my mind: Why did Golmant and Ulrich stop at 2002? The study missed the recovery after 911, the housing boom, and the subsequent housing bust. It would seem the report is 5 years old the moment it was published. I emailed John Hartgen at the ABI asking for a copy of the study and also asked if there was any hard data from 2002-2006.

Mr. Hartgen responded with a PDF of the study The Baby Boomers Meet Up at Bankruptcy Court but referred me to the authors for additional information. A chart from the article follows annotated in red by me.



It sure would be interesting to see what those numbers would look like with data from 2002-2006. I have email questions in to the authors of the study about those missing years.

A Perfect Storm of Debt

Although there are no hard numbers from the report for the years 2002-2006 there is plenty of anecdotal evidence about boomer stress in articles such as a Perfect Storm of debt puts Floridians in bankruptcy.

Mortgage woes, higher gas prices and a "perfect storm" of other financial troubles have caused personal bankruptcies to spike in Central Florida so far this year, according to the latest court records.

Nearly 1,300 personal-bankruptcy cases were filed in Orlando during the first three months of 2007, nearly twice as many as during the first quarter of last year, figures from U.S. Bankruptcy Court for the Middle District of Florida show.

And that may be just a hint of what is to come, bankruptcy lawyers say. From bankruptcy trustees and lawyers to clerks and credit counselors, everyone tied to the process is seeing more cash-strapped people coming through the door on their way to insolvency.

"Some people are just drowning in everything, whether it's debt, job loss, divorce or some health issue," George Janas, a credit counselor and managing partner of Orlando-based Consumer Debt Counselors, said Tuesday.

"They've been living so close to the edge financially -- when something big hits, it's enough to put them behind," he said. "And they can't catch up again."

Personal bankruptcies did plummet across the country after the new law took effect. In the Orlando portion of the Middle District of Florida, for example, the first-quarter caseload fell from 3,644 in 2004 and 3,300 in 2005 to just 658 last year.

But this year's first-quarter filings, while down 60 percent from 2005, to 1,298 cases, are up 97 percent from a year ago.

"There has been a perceptible increase in filings by people who are trying to prevent foreclosure," said Jonathan Alper, a bankruptcy lawyer in Lake Mary. "I don't think we've begun to see the full effect of that."

The housing boom also lured some people into buying a second home as an investment, sometimes with the aid of creative financing such as "teaser rate" or interest-only mortgages they can no longer afford, Alper said. If they qualify to file a Chapter 7 personal bankruptcy, he noted, it leads to the liquidation of their assets, including the second home, but lets them protect their primary residence.

Skyrocketing property-insurance premiums and property taxes, along with rising gas prices and that old standard, credit-card debt, are also taking their toll.

"There are a lot of things that are just out of people's control," said Anne-Marie Bowen, an Orlando lawyer and president of the Central Florida Bankruptcy Law Association. "Most people try to avoid bankruptcy at all costs, but at some point they need to realize they have to do something about their unsecured debt so they can keep a roof over their heads."

"There has been a perceptible increase in filings by people who are trying to prevent foreclosure," said Jonathan Alper, a bankruptcy lawyer in Lake Mary. "I don't think we've begun to see the full effect of that."

I suspect we have nowhere seen the full effect yet and that is going to hold back housing prices for years to come. Boomers counting on rising home prices as their retirement funding are going to be facing increasingly difficult times. The housing ATM is simply out of cash with a perfect storm of debt waiting those facing retirement.

This post originally appeared in Minyanville.

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