Bankruptcies up 38 percent in 2007

The number of people filing for protection from creditors over non-business related debts jumped dramatically in 2007 over 2006, according to a new report issued by the Administrative Office of the U.S. Courts.

There were more than 822,000 bankruptcy cases involving personal or consumer debt (including credit card and mortgage debt) in 2007 -- a 38 percent increase from 2006's caseload of 597,900.

Bankruptcies actually fell off between 2005 and 2006, the first full year after bankruptcy laws were amended to include requirements for debt counseling and a "means test" before consumers could file for bankruptcy. The amendments were widely believed to make filing for bankruptcy more difficult. That explained why personal bankruptcies plummeted from more than 2 million in 2005 down to a half million the next year (a 70 percent drop).

At the time, consumer advocates said the bankruptcy law changes would mean more people would suffer with mountains of debt for longer periods of time.

Now, the bankruptcy numbers are inching upward as the economy shows signs of stalling amid rising personal debt.

A reflection of the economy?
"This isn’t surprising given the huge amount of stress people are under from mortgage and credit card lending without regard to ability to pay," Lauren Saunders, managing partner for the nonprofit National Consumer Law Center in Washington, D.C., says in an emailed response.

Gail Cunningham, senior director of public relations for the National Foundation for Credit Counseling, a nationwide group of nonprofit consumer credit counseling agencies, agrees the bankruptcies are not surprising given what counselors are hearing each day from consumers who are drowning in debt.

“It is not surprising that bankruptcies are on the rise," Cunningham writes. "Before the mortgage meltdown, consumers were used to running up debt, paying it off by tapping into the equity in their home, and then repeating the process. Now, there is either no equity remaining due to having previously been used, or the homeowner finds himself upside down where his loan exceeds the market value of his home."

Fewer options for debtors
She continues: "Once he reaches his credit limit on his existing cards, he may try to open new lines of credit. However, due to the fact that he has become a greater risk by having amassed a large amount of debt, coupled with the credit crunch which has returned us to more traditional lending standards, he may not be eligible for more credit."

She adds: "He finds himself unable to service his debt, nor can he sustain the lifestyle to which he has become accustomed. He now turns to bankruptcy as the answer. Previously, after a consumer’s bankruptcy had been discharged, he’d come home to a mailbox full of credit card offers. Today, that is not likely to happen, and if credit is extended to him after bankruptcy, it is likely to be at a very steep rate. The smart consumer will recognize the need to adjust his spending, and do whatever it takes to reduce his debt load, not add to it.”

Business bankruptcies up, too
Businesses weren't spared any misery in 2007. The new report shows business-related bankruptcies were up 44 percent in 2007 over 2006 -- from more than 19,000 to just over 28,000.

See related: "Will you really use the stimulus package windfall on debt?"