Bankruptcy Update

November 17, 2008

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Trader Mark writes about bankruptcies. The numbers are growing very rapidly, especially in states where real estate prices have soared and crashed, e.g. California, Nevada and Florida.

New York Times: Downturn Drags More Consumers into Bankruptcy

Courtesy of Trader Mark at Fund My Mutual Fund

Keep in mind, one of our themes for 2009 is the end of the debt "shell" game (move debt from one pocket to another), and a large wave of coming personal bankruptcies. [November 2009 Thoughts/Roadmap]

Starting to see mounting evidence now beginning….8% increase sequentially (month over month) and 34% year over year. Keep in mind that huge spike in the graphic is when your favorite credit card companies (some of which will now be sucking off your tax dollars) lobbied to have the bankruptcy laws changed to make it much more difficult (read: expensive) to file… heads they win, tails they win. Cramerica – for the corporation, by the corporation. (click to enlarge graphic)

The economy’s deep troubles are pushing a growing number of already struggling consumers into bankruptcy, often with far more debt than those who filed in previous downturns.
Plummeting home values, dwindling incomes and the near disappearance of credit have proved a potent mixture. While all the usual reasons that distressed borrowers seek bankruptcy — job loss, medical bills, divorce — play significant roles, new economic forces are changing the calculus of who can ride out the tough times and who cannot.
The number of personal bankruptcy filings jumped nearly 8 percent in October from September, after marching steadily upward for the last two years.
Filings totaled 108,595, surpassing 100,000 for the first time since a law that made it more difficult — and often twice as expensive — to file for bankruptcy took effect in 2005. That translated to an average of 4,936 bankruptcies filed each business day last month, up nearly 34 percent from October 2007.
As banks have pulled back on lending, he said, consumers have been finding it more difficult, and in many cases impossible, to use credit cards, refinance their home mortgages or fall back on their home equity lines to get them through a rough period.
“With the consumer credit tightening and the economy in a nosedive, this pop could just be the beginning of a long-term rise in the bankruptcy filing rate to levels that are even higher than we had before the 2005 bankruptcy law.”
Not only are filings up, but recent filers have had much more credit card debt, often run up in an attempt to keep current on a mortgage that now exceeds the value of their home, bankruptcy lawyers said in interviews. A recent study found that the typical family who filed for bankruptcy in 2007 was carrying about 21 percent more in secured debts, like mortgages and car loans, and about 44 percent more in unsecured debts, like credit cards and medical and utility bills, than filers in 2001.
Their incomes, meanwhile, remained static over those six years, according to the study, which used data from the 2007 Consumer Bankruptcy Project, a joint effort of law professors, sociologists and physicians. (this is one of our bigger "long term" themes – the damage of stagnating wages in the nation as we move to a more global mean in wages especially for the bottom 2/3rds – so your cost of life goes up, your wages do not in real terms – you borrow to make it up over time – until the dam eventually bursts. The other alternative is to cut back expenditures – and in an economy that is 70% consumer spending that might be good for the individual, but not so good for the national economy)
Not surprisingly, filings are increasing most rapidly in states where real estate values skyrocketed and then crashed, including Nevada, California and Florida. In Nevada, bankruptcy filings in October were up 70 percent compared with last year. In California, bankruptcies jumped 80 percent in the same period, while Florida’s filings rose 62 percent.
Bankruptcy lawyers report that they have been having more consultations with middle-class families with six-figure incomes — including many who either bought a home during the boom or pulled out most or all of their available home equity just keep to up with the cost of living. (bingo)
“There are a lot of foreclosures that haven’t taken place yet because people still have available credit,” said Jeffrey H. Tromberg, a bankruptcy lawyer in Fort Lauderdale, Fla. “We don’t see them until they’ve maxed out their credit cards.” (hence a lot of bankrupt people are not showing up in the figures yet – they will in 09 and 10 – when that last shell to hide the debt is gone/maxxed out)
A similar pattern has emerged in Las Vegas, where more people are filing for Chapter 7 bankruptcy protection because it makes more financial sense to walk away from their homes. Real estate values have plummeted, and now the local economy is also suffering. Car salesmen and casino dealers are being laid off. Valet parking attendants and masseuses are collecting less in tips.

The rest of the story has the typical individual stories – including the all too common story in America of filing bankruptcy because of lack of health insurance.