Tougher law led to spike in bankruptcies

WASHINGTON — Personal bankruptcies soared 30 percent to a record high last year, surpassing 2 million for the first time, as financially strained people rushed to file before new restrictions took effect Oct. 17.

Bankruptcy petitions filed in federal courts totaled 2,039,214 in 2005, up from 1,563,145 in 2004, according to data released by the Administrative Office of the U.S. Courts.

A new law, which brought the most comprehensive revision of the U.S. Bankruptcy Code in a quarter-century, made it more difficult to erase credit-card and other debts in bankruptcy.

"It is ironic that, at least in the short term, a law Congress hoped would reduce bankruptcies instead caused the largest upward spike in history," said Samuel Gerdano, executive director of the American Bankruptcy Institute, an organization of bankruptcy judges, lawyers and other experts.

By contrast, he said, personal bankruptcy filings have fallen sharply so far this year under the impetus of the more stringent law.

The law bars those with above-average incomes from Chapter 7 — where debts can be wiped out entirely — except under special circumstances. Those deemed by a new "means test" to have at least $100 a month left over after paying certain debts and expenses must file instead a five-year repayment plan under the more restrictive Chapter 13.

The new figures showed that last year there were 1,631,011 personal bankruptcy filings under Chapter 7, up from 1,117,766 in 2004. Chapter 13 filings declined to 407,322 from 444,428.

In the final quarter of the year, which included the two weeks preceding the Oct. 17 deadline, filings under Chapter 7 ballooned to 560,654 from 254,518 in the October-December period of 2004. Chapter 13 filings fell to 93,714 from 109,116.

A group representing bankruptcy attorneys has contended, in a recently released report, that the law has failed to stop abuses and has stymied people who have legitimate reasons to file for bankruptcy.

The report by the National Association of Consumer Bankruptcy Attorneys was based on an analysis of 61,335 people who had gone to credit-counseling agencies, the required first step under the new law before filing bankruptcy. Of the 61,335, 97 percent were unable to repay any debts and 79 percent had gotten into financial trouble because of job loss, huge medical expenses or the death of a spouse, the report said.

Passage of the new bankruptcy law came after eight years of strenuous efforts by congressional backers, banks and credit-card companies.

Supporters said the new provisions were needed to curb abuses of the bankruptcy system. Opponents said the changes would be especially hard on low-income working people, single mothers, minorities and the elderly, and would remove a safety net for those who have lost their jobs or face mounting medical bills.