Hard times
Bankruptcy filings jump, but remain far below levels before major law changes
Bankruptcy filings jump, but remain lower than 2004

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By Don Mecoy

Published: January 13, 2008

BANKRUPTCY FILINGS in Oklahoma jumped 31.2 percent in 2007, but remained well below the number filed in the years preceding Congress' sweeping changes in 2005 that made it harder for consumers to completely discharge their debts.

The weakening economy and heavy debt loads of many consumers likely will push more Oklahomans into bankruptcy, several local observers said.

Margo Mitchell, head of a consumer credit counseling agency in Tulsa, believes the number of consumers seeking protection from creditors will continue to mount.

"You bet,” said Mitchell, president and chief executive officer of Consumer Credit Counseling Service of Oklahoma. "I think they will be higher this year.”

Roger Beverage, president and chief executive officer of the Oklahoma Bankers Association, said economic conditions almost certainly will push more consumers beyond their abilities to pay their bills.

"I don't want to say we're going into a recession, but if I was a betting man I would say we're going into a recession,” Beverage said. "The size of consumer debt right now is almost scary.”

Last year, 8,748 bankruptcy filings were recorded in Oklahoma's three federal districts. That was up from 6,669 filings in 2006.

However, totals in earlier years were much higher. In 2004, the last full calendar year before the major changes enacted in bankruptcy laws, 26,348 bankruptcies were filed in Oklahoma.

Nationally, consumer bankruptcy filings last year rose nearly 40 percent over 2006, according to the American Bankruptcy Institute.

"The roughly 40 percent spike in consumer bankruptcies during 2007 presages even higher filings this year, as the heavy consumer debt load is made worse by the home mortgage crisis,” Institute Executive Director Samuel J. Gerdano said.

The housing slump, high oil prices, tighter credit and rising unemployment are making it harder for consumers to pay their bills. Analysts expect most major U.S. financial companies to post lower profits, or losses, when they report fourth-quarter results this month.

Last week, Capital One Financial Corp. said its 2007 earnings will fall well short of its previous expectations, blaming the underperformance in part on increased loan delinquencies.

Relief for harried homeowners?

In the fall of 2005, debtors packed federal bankruptcy courts seeking protection from creditors before a far-reaching new bankruptcy act took effect. The unprecedented number of filings overwhelmed courts, and may have held down filings for months.

The new law, meanwhile, made it more difficult for consumers to discharge debts through a Chapter 7 filing and made the act of filing for bankruptcy more difficult and expensive.

"The point of the law was to make it more difficult to incur debts and simply walk away from them,” Beverage said. "It has worked.”

The current subprime mortgage crunch has prompted some in Congress to consider a measure that would allow bankruptcy judges to freeze or even cut mortgage payments for consumers who are having problems with payments.

Beverage said bankers and others in the financial services sector are opposed to such changes, in part because of fears that rules in the earlier bankruptcy legislation could be rescinded.

"Congress is going to react to the subprime meltdown,” Beverage said. "The concern is that they're going to kill a gnat with a sledgehammer.”

Gary Morrissey, an Oklahoma City bankruptcy attorney, said he is worried that it may be too late to help many consumers who are in danger of defaulting on adjustable rate mortgages.

"The biggest problem I see is so many people are not financially savvy,” Morrissey said. "They don't know what they've done, or they were not aware what an adjustable rate mortgage was.”

But some homeowners who understood the consequences of signing an adjustable rate mortgage were assured by loan brokers not to worry about rising payments, Morrissey said.

"They were told they could re-finance to a fixed rate in two years. Now they're behind in their payments so they don't qualify for a fixed rate,” he said.

Who gets paid?

Morrissey and Mitchell are concerned by a trend they have seen among Oklahoma consumers with financial problems of paying credit card bills at the expense of mortgage payments.

"We're seeing about 25 percent of people coming in to see us are current on credit cards, but past due on the mortgages, which to me is totally upside-down,” Mitchell said. "We always preach pay your mortgage first.”

Once consumers fall behind on house payments, which typically represent a large part of their monthly budget, it's hard to catch up, Mitchell said.

Desperation, Morrissey said, leads to bad decisions like taking out payday loans.

"Once I talk to somebody and they tell me they have $3,000 in payday loans or cash advance loans, I know they're a candidate for my services,” the bankruptcy attorney said.

Mitchell said she has been surprised by the growing number of seniors forced into bankruptcy. Among the bankruptcy filers who attend required counseling at Mitchell's agency, "40 to 50 percent are senior citizens,” she said.

"I just find that sad,” Mitchell said.

Last month's ice storm pushed some Oklahoma consumers over the edge by forcing them to buy things they had not expected, Mitchell said.

"Who budgets for an ice storm?” she said. "So many Americans are just living from paycheck to paycheck.”