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Tuesday, January 05, 2010 2:13 AM

Bankruptcy Filings - As Ye Sow So Shall Ye Reap

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Two quick ways to dump debt are to walk away from no recourse mortgage loans and file for chapter 7 bankruptcy.

The debt slave act of 2005, better known as the bankruptcy reform act of 2005 was supposed to prevent the latter but it is no surprise in this corner that it didn't. In fact, the law encouraged banks (and was purposely written to allow banks) to make high-risk loans thinking they could make debt slaves out of people forever.

It is fitting the law backfired. As ye sow so shall ye reap.

And now, with unemployment at 10%, the surge is on. The Wall Street Journal notes Personal Bankruptcy Filings Rising Fast.

The number of Americans filing for personal bankruptcy rose by nearly a third in 2009, a surge largely driven by foreclosures and job losses.

And more people are filing for Chapter 7 bankruptcy, which liquidates assets to pay off some debts and absolves the filers of others. That is significant because a 2005 overhaul of federal bankruptcy laws aimed to encourage Chapter 13 filings, which force consumers to sign onto debt-repayment plans in exchange for keeping certain assets.

Overall, personal bankruptcy filings hit 1.41 million last year, up 32% from 2008, according to the National Bankruptcy Research Center, which compiles and analyzes bankruptcy data. It is the highest level of consumer-bankruptcy filings since 2005. Consumers rushed to file in 2005 before the new bankruptcy laws took effect in October of that year.

Chapter 7 filings were up more than 42% as of November 2009, compared with the same period a year earlier, according to the research center. November is the most recent month with analyzed data available. Chapter 13 filings rose by 12% and made up less than a third of 2009 filings as of November.

"I can't see over the top of the files on my desk," said Cathleen Moran, a bankruptcy attorney at Moran Law Group in Mountain View, Calif., likening it to the rush of clients before the revised law went into effect. In a three-month period before those rules changed in 2005, her firm filed five times as many cases as usual.

Ms. Moran's clients in 2008 typically were people who earned between $40,000 and $80,000. That changed last year when a rash of people who earned $100,000 to $300,000 began filing as well, she said.

"Expenditures that were rational when these people were working at the peak of their salary just are no longer sustainable when they lose jobs or take jobs at a third or a half of what they were making before," Ms. Moran said.
Permanent Lifestyle Changes

Neither housing prices nor wages will return to what they were. So even after people find jobs, lifestyles for all but a lucky few will not return to where they were. Salary cuts are going to necessitate permanent lifestyle changes.

If you are unemployed, struggling, and deep in debt, it may be best to get it over with. If you manage to land a job first, you will struggle with the means test, forced repayments, credit rebuilding, and other issues on top of a reduced lifestyle. So if you are doomed to file anyway, try and do so when it will do you the most good.

I do not recommend credit counseling services as many are fraudulent and most of the rest are sponsored by banks with their best interest in mind, not yours.

But please, if you are considering filing bankruptcy for any reason, do not run up credit card balances before you file or make blatantly unaffordable purchases. That constitutes fraud and it could land you in jail.

As always, please consult an attorney that knows the laws and procedures for your state.

Mike "Mish" Shedlock
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