Shortly after the passage of the Debt Slave Act of 2005 (more widely known as the Bankruptcy Reform Act of 2005) the number of bankruptcies collapsed. Now, in conjunction with soaring unemployment, Bankruptcy filings return to pre-reform-law pace.

Pummeled by unemployment, foreclosures, the credit crunch and other manifestations of the worst recession in memory, Americans are filing bankruptcy petitions at rates approaching those that mounted before the new bankruptcy law took effect in October 2005.

“That law was draconian, and it included huge disincentives to filing for bankruptcy,” said Robert Lawless, a professor of law at the University of Illinois College of Law and a nationally recognized expert on bankruptcy rules, regulations and rates. “So these numbers show that people are really hurting right now.”

In [2005], just before the more stringent rules took effect, 6,339 bankruptcy petitions were filed during an average business day. In 2006, with the law fully in force, the rate plunged to 2,372 per day. Now, Americans are flooding back into bankruptcy court at the rate of 5,593 per day.

By year’s end, about 1.45 million bankruptcy petitions will be filed, Lawless said. The American Bankruptcy Institute offers a similar prediction of more than 1.4 million petitions.

That would represent an increase of about 35 percent over last year’s numbers. The modern record is about 2 million bankruptcy petitions, set in 2005 as filings spiked just ahead of the effective date of the new law.

“The situation certainly is not getting any better and it might be getting worse,” Lawless said. “We won’t see any improvement for a while.”

Effect of Hurricane Katrina

It’s important to remember that 2005 was the year of Hurricane Katrina, the most costly hurricane in US history. Katrina in conjunction with what I consider grossly unfair legislation combined to form a bankruptcy spike that would last for years.

In 2005, banks got their dream list of everything they wanted in “reform”. Now that wish list has come back to haunt them because they made poor lending decisions to horrible credit risks on the assumptions that they would be paid back and consumers would not file.

I expect this Congress to revise bankruptcy code yet again. Regardless, expect bankruptcies to soar right along with rising unemployment.

Thinking of Filing Bankruptcy?

If you are about to file, please Don’t even think of spending frivolously before filing.

Charging up a storm on your credit cards before you file is considered fraud.

If the court determines you made purchases shortly before you filed for bankruptcy — which they can easily see by looking at your credit card statements — they may decide you took out loans with no intention of paying them back. That’s called fraud. At the very least, those debts will not be discharged, or your entire bankruptcy case may be thrown out of court.

If you transfer money and gifts to your family and friends, you can find yourself in worse trouble. It’s easy to run afoul of the fraudulent transfer laws — rules designed to keep people from making gifts to take value out of the hands of creditors.

The most flagrant abuse of the fraudulent transfer laws is when people give away cash that they expect to get back after the bankruptcy is complete. It’s clearly a fraudulent transfer if both the giver and the recipient know that the goods are only being held until after the bankruptcy.

I have reported on bankruptcy filings before. However, I do want to warn those about to file not to commit fraud.

Mike “Mish” Shedlock
Click Here To Scroll Thru My Recent Post List