Posted on: Saturday, May 17, 2003

Bankruptcies keep brisk pace

By Andrea Coombes
CBS MarketWatch

SAN FRANCISCO — Job losses and high levels of consumer debt have pushed personal bankruptcy filings to a record high.

Personal filings rose 7.4 percent to 1.57 million in the year ended March 31 — the highest number of Americans ever to file — from 1.46 million a year earlier, according to the U.S. Courts' Administrative Office.

But business filings dropped 5.8 percent to 37,548 from 39,845. Taken together, total bankruptcies filed in federal courts jumped 7.1 percent to a record 1.61 million from 1.5 million the year before.

The increase in personal filings is expected to continue through the year as the weak economy, which has triggered thousands of job losses, meets high levels of debt, experts said.

"No one can sustain nine months of lost income without there being a severe problem in their ability to pay their month-to-month debt," said Samuel Gerdano, executive director of the American Bankruptcy Institute, a nonpartisan research group of bankers, professors, accountants and other experts.

"There's a lot of debt still to be wrung through the system. We expect the numbers will be strong through most of the rest of the year," he said.

The bankruptcy picture would be even bleaker if interest rates weren't so low, Gerdano said. "The biggest percentage of debt that people carry on a month-to-month basis is their home mortgage, and the servicing of that debt has been helped by low interest rates."

While creditors argue that consumers use bankruptcy filings to erase the results of their undisciplined spending sprees, consumer advocates say other factors play a part.

"It doesn't help that we have a proportion of households who have very high levels of debt, but that's not usually the trigger. It's usually an emergency that forces their hand," said Travis Plunkett, legislative director of the Consumer Federation of America, a consumer advocacy group.

"They have high levels of debt, they intend to pay, and then they're hit by high medical bills or they lose their job," he said.

The three main drivers behind consumers' bankruptcy filings are job loss, high medical bills and divorce, he said. But when the economy slumps, the first two factors take precedence. "We know that the economy-related causes are probably more significant than usual," he said.

And in these days of reduced medical coverage, even the insured find an unexpected medical expense can be a precursor to bankruptcy, he said. "Half of all people who declare bankruptcy for health-bill related reasons have insurance. It's the issue of the underinsured."

The 5.8 percent drop in business filings is a far cry from the previous year, when business bankruptcies jumped by 10.7 percent, to 39,845 in the year ending March 2002, from 35,992 in the year ended March 2001. The decrease this year is partly attributable to the fact that so many companies filed previously, Gerdano said.

The record level of personal filings will likely spur even more intense debate over a bankruptcy-reform bill being considered in the U.S. Senate.