As foreclosure filings soared to about 2.2 million last year, personal bankruptcy filings also soared from 801,840 million in 2007 to 1.06 million in 2008, based on data released by the American Bankruptcy Institute.
ABI executive director Samuel Gerdano said ABI expects consumer bankruptcies to rise more swiftly throughout 2009 because of job losses, lack of job openings that match the skills of the unemployed, foreclosure problems and inabilities to pay credit card loans and other consumer debts.
Gerdano also said consumers have become more enlightened about the Bankruptcy Abuse Prevention and Consumer Protection Act. When the law was passed by Congress in 2005, there was a general consumer perception that the law made it very difficult and very unpalatable to file for bankruptcy. Before the law was implemented, the total number of personal bankruptcy filings increased by a record 32 percent as people rushed to get approvals before the law went into effect. In 2006, overall filings fell by 72 percent as people were informed about the adverse consequences of bankruptcy filings.
But consumers become more informed as they find ways to get out of their financial and foreclosure problems and survive. Chapter 7 bankruptcy filing was created to help extremely troubled consumer debtors get out of the pit and make a fresh start. After a debtor’s filing is approved, his assets are sold and the proceeds given to secured creditors and other priority creditors. All other debts unpaid after the payouts are canceled.
Henry Sommer, an officer of the Consumer Bankruptcy Assistance Project in Philadelphia, said the foreclosure problem also contributes to the rise in bankruptcy filings as homeowners could not use their home equity to solve their financial troubles.
So far, all the federal programs launched to help reduce the number of foreclosed homes nationwide achieved little success. The Hope of Homeowners program administered by the U.S. Federal Housing Agency had only 69 applicants as of December 2008.
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