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Personal debt is public's problem

October 22, 2008|DAVID LAZARUS

Matthew Shelbourn knows money. The 27-year-old Cerritos resident studied accounting as an undergrad at USC and kicked around various jobs in the financial sector before settling into his current gig as controller at an Anaheim pipe-manufacturing company.

By year-end, though, Shelbourn said he's all but certain to file for Chapter 7 bankruptcy protection.

He told me he's struggling to crawl out from under about $150,000 in student loans, $25,000 in credit card debt and $20,000 in medical bills, not to mention a pile of late fees that have accumulated because of missed payments.

"If I had to pay it all back, I'd find a way," Shelbourn said. "But I feel like I'm at a turning point in my life. I want a clean slate. I want to start over."

Like a lot of people, he's nervous about the economy sliding into a prolonged recession and the effect this could have on his job, his health insurance and his ability to survive. Shelbourn said he decided to seek bankruptcy protection before things got worse.

It's a decision many people have made in recent weeks. Consumer bank- ruptcy filings rose 28.6% nationwide last month from a year before,according to the American Bankruptcy Institute.

In August, bankruptcy filings were up 29.2% from a year earlier.

"The continued rise in personal bankruptcies reflects high consumer debt, made worse by energy costs and the weak housing market, trapping many households in homes they can neither afford nor sell," said Samuel Gerdano, the institute's executive director. "We expect consumer bankruptcies to exceed 1.1 million new cases by year-end."

If he's right, that would handily top the 822,590 bankruptcies recorded last year and would be the highest level since 2005, when Congress passed legislation intended to reform the bankruptcy process and make it harder for people to escape their debts.

American consumers owe nearly $2.6 trillion in non-mortgage debt, or about $8,460 for every man, woman and child, according to the Federal Reserve. Credit card debt alone is fast approaching $1 trillion.

Henry Sommer, president of the National Assn. of Consumer Bankruptcy Attorneys, said these are boom times for people in his line of work. Many bankruptcy-related law firms are working full tilt and rapidly bringing on additional staff.

"There's a lot of business," he said. "This is a growth area."

This wasn't supposed to be the case. When the Bankruptcy Abuse Prevention and Consumer Protection Act took effect three years ago this month, it was seen by many as a gift to the credit industry, which had long complained that its most-indebted customers were shirking their obligations by filing for Chapter 7 protection.

A Chapter 7 bankruptcy essentially releases a debtor from responsibility to pay most outstanding bills to creditors. The downside is it leaves a black mark on your credit record for 10 years and could make it difficult to obtain loans in the future.

A Chapter 7 filing also can result in the loss of your home, car and other property if their value surpasses certain levels. In California, for example, your home may be forfeited if it's worth $150,000 more than you owe on it (which, all things considered, is unlikely if you're deep enough in the hole to be considering bankruptcy).

The 2005 law made it tougher (and more expensive) to file for Chapter 7 protection and attempted to steer more people into Chapter 13 bankruptcies, which require repayment of debts within three to five years.

Yet of 597,965 consumer bankruptcy cases filed in 2006, more than 58% qualified for Chapter 7 under a means test imposed by the new law. Nearly 61% of bankruptcies qualified last year.

That percentage rose to 64% in the first quarter of 2008 and almost 68% in the second quarter.

"What that tells us is that the people who are filing for bankruptcy are people who don't have a lot of money or who can't afford to pay these debts back," said Maureen Thompson, legislative director for the bankruptcy attorneys' association.

"It's now harder to file for Chapter 7 bankruptcy," she said.

"You have to pay more to do it. There's a lot of paperwork. But people still qualify."

Attorney fees vary throughout the country. In California, Chapter 7 filings can cost as much as $3,000.

To qualify, a filer's income must be below the state's median -- in California, that's about $47,000 for an individual. Or, the filer must meet other requirements for living expenses, unsecured debt or special circumstances, such as loss of a job.

Shelbourn, who makes about $41,000 a year, said he agonized over whether to go down the bankruptcy road. In the end, he decided it would be the fastest way to get his finances in order.

"I'm a practical, numbers person," Shelbourn said. "I did the calculations and saw that my credit card debt alone would suck away all my income. I know I got in over my head and made some mistakes. But I really felt like the prudent thing to do would be to start over."

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