MOUNT VERNON — The number of bankruptcy filings in the district that includes Knox County jumped in 2007.
According to data from the United States Bankruptcy Court’s Southern District of Ohio, which includes much of the southern portion of the state as well as Knox County, the number of filings increased to 21,552, compared to 17,046 in 2006.
Local attorney D. Derk Demarree said that from what he is hearing, the crisis in the mortgage and housing industry, as well as other financial pressures, is likely causing more people to consider bankruptcy.
In October 2005, the number of bankruptcy filings soared to 19,811 for the district, compared to 3,729 in October 2004. The spike in filings was a reaction to a new law that went into effect Oct. 17, 2005, which made it more difficult and expensive to file. The total number of filings in 2005 was 60,823.
President Bush signed the Bankruptcy Abuse Prevention and Consumer Protection Act in April 2005. Proponents of the act, which included many in the banking and credit card industry, argued that too many debtors were abusing the bankruptcy system to wipe out debts, even when they had the ability to repay.
Under the new law, filers seeking a Chapter 7 must pass a means test to determine whether they are able to repay their debt. Chapter 7 bankruptcy wipes out unsecured debt, such as credit card bills. Under the new law, filers who do not meet the requirements of the means test must file for Chapter 13 bankruptcy, which forces them to repay at least a portion of their debt.
Demarree said he thinks people are used to the requirements of the new law. Before it took effect, he said, there was a lot of fear that it would be impossible to file for bankruptcy. Basically, he said, it forces more people to file for Chapter 13 bankruptcy, under which they must repay at least a portion of the debt.
“To me, the law has made for more work,” he said. “For people who wish to file, it’s made the process more work. I’m not sure what the benefit is.”
The new bankruptcy law also forced bankruptcy filers to undergo credit counseling. Demaree recommends a credit counseling company, which many bankruptcy filers find to be nice and informative, but said he doesn’t see a lot of changes in spending habits.
“It’s to be poor in a wealthy nation,” he said. “It’s hard to resist all that is available, especially when you want something for your child.”
Local attorney F. Richard Heath said the new law just erected bureacratic barriers for filers; he doesn’t think credit counseling, although it sounds like a good idea as a practical matter, has much of an impact.
“Most people who file are on the low end of the income scale,” he said. “I don’t think it’s had a net positive effect on that class of people or for the system.”
The National Association of Consumer Bankruptcy attorneys argues that the law has simply increased the paperwork hassle and made the process more expensive for already cash-strapped individuals. Association representatives say very few filings stem from wasteful spending, but are caused by unforeseen circumstances such as loss of a job or medical bills.
The American Bankers Association has argued that the new law has created a more balanced system that better matches the level of relief with the filer’s ability to repay his or her debts. The ABU maintains that debtors who meet the requirements for Chapter 7 have their debts fully discharged; those who do not, rightly have to pay back at least some of their debt.
