Bankruptcy filings surge as deadline nears

BOISE, Idaho — Rushing to beat an October deadline, when the biggest overhaul of the bankruptcy law in 25 years goes into effect, rising numbers of Americans seeking to have their debts erased have filed for protection.

Since President Bush signed the new law in April, bankruptcy filings have jumped, particularly in the heartland. Filings in the four months through July are up 17 percent this year over last in Cleveland, 14 percent in Milwaukee and 22 percent in northern Iowa, according to court filings, matching similar patterns in the Midwest and parts of the South and rural West.

Nationwide, bankruptcy filings for April, May and June were up by 12 percent over the same period last year, according to LexisNexis, the data-collection service that tracks filings ahead of the quarterly reporting done by the federal courts. The rise is coming after bankruptcy had leveled off and started a slight decline last year.

Under the revised law, debtors who earn more than the median income in their state and who can repay at least $6,000 of their debt over five years will no longer be able to have their debts wiped out for a fresh start under the more generous provisions of Chapter 7 of the bankruptcy code. Instead, they will have to seek protection under Chapter 13, which requires a payback schedule. In addition, under the new provisions, they will have to enroll in a court-supervised financial-counseling program.

The rise in filings, which lawyers and bankruptcy experts say is driven in large part by people who say they fear it will become much more difficult to escape debt and seek a fresh start under the new law, appears to have caught some bankers and lawyers by surprise.

When the new bankruptcy bill was passed by Congress in the spring, bankers predicted it would turn many people away from the protection of the courts by making it harder to extinguish debt. That may turn out to be the case. But thus far, it has resulted in a rush to the courts in many places.

In Idaho, the soundless wave of Americans going broke washes up at the clerk's office in bankruptcy court, with nearly 20 fresh declarations of desperation every working day.

Bankruptcy filings rose eightfold in the past 30 years, from 200,000 in 1978 to 1.6 million last year. Although filings vary, court records show the pace for this year, if it holds up, projects to about 1.8 million bankruptcies. The overwhelming majority are personal, not business.

The Federal Reserve reported household debt hit a record high last year, relative to disposable income.

"Bankruptcies historically have risen with debt, and a lot more people are now living near the edge," said Henry Sommer, president of the National Association of Consumer Bankruptcy Attorneys. "What we're seeing now is a rush to get in before October. After that, a certain amount of people will be priced out of bankruptcy."

Courts in Indiana, Nebraska, Ohio, Tennessee, Texas and Wisconsin, among other places, report that people are hurrying into bankruptcy in numbers rarely seen. "I'm probably about four times more busy than normal," said Merv Waage, a bankruptcy lawyer in Denton, Texas.

Idaho, a state with an otherwise prosperous sheen to its surface economy, is among the per-capita leaders in a category that no state will brag about. Filings were up 11 percent for July over the same period last year, a record pace for the year.

Maureen Balleza contributed reporting from Houston for this article.