As borrowers stumble, bankruptcies soar in state

by Russ Wiles - Nov. 7, 2008 12:00 AM
The Arizona Republic

Arizona's bankruptcy filings surged to a new yearly high in October, with observers seeing no relief in sight.

Consumers and businesses initiated 1,552 filings in the Valley and 2,119 statewide last month. Both were easily the highest totals so far in 2008.

Nationally, bankruptcy filings so far this year have surpassed the full year's tally from 2007.

"We've been busier than I ever remember, and I've been doing these since the 1980s," said Joe Volin, a Tempe bankruptcy attorney. "I've never seen anything like it."

Chapter 7 cases account for more than 80 percent of the total, both in the Valley and across Arizona, according to the U.S. Bankruptcy Court in Phoenix. They allow filers a fresh financial start after the court uses non-exempt assets to pay creditors. Chapter 13 cases account for most of the rest. They involve court-supervised, debt-repayment plans designed for filers with regular income.

Chapter 7 filings rose 127 percent in the Valley and 105 percent statewide in October compared with a year earlier, while the Chapter 13 figures were up 53 percent and 40 percent, respectively.

Even though they didn't rise as much, the Chapter 13 increases are more worrisome, said Mike Sullivan, director of education at Phoenix debt-counseling firm Take Charge America. That's because Chapter 13 is less attractive to filers; it results in a debt-repayment plan rather than a broad dismissal of debt.

"It shows those people must be desperate," Sullivan said.

Although job losses, divorces and medical bills remain leading catalysts for bankruptcy, financial troubles are snaring other types of individuals, too.

Volin said he is seeing more real-estate investors fall into a hole, particularly those with adjustable-rate mortgages that they haven't been able to refinance to better rates because their rental properties continue to lose value.

"They've been left with a mortgage payment that's so much higher than their rental income," he said.

Nationally, bankruptcy filings in October topped the 100,000 mark for the first time since the bankruptcy laws were changed in October 2005 to make the process more restrictive to filers. The U.S. total of 106,266 filings was up 20 percent from September, the American Bankruptcy Institute reported, citing data from the National Bankruptcy Research Center.

So far in 2008, the 880,076 filings nationally exceed the total of 822,590 for all of 2007.

"October's sharp spike in new consumer bankruptcies confirms the severe financial stress on household budgets caused by high debts, flat incomes and declining home values," said Samuel J. Gerdano, the ABI's executive director.

Sullivan wonders whether the tougher bankruptcy-reform legislation of 2005 might have given lenders a false sense of security.

"The credit-card companies took that as a license to make credit easier because they thought they wouldn't have to worry about losses, since people couldn't file as easily," he said. "But the numbers are going up, which means things are worse than they thought."