Credit Basics
With Personal Bankruptcies Continuing To Be Filed At Record Rates, Experts Say The Face Of Bankruptcy Is Changing
Monday, January 27, 2003
Pamela Yip
The Dallas Morning News
"It really is much more reflective of the entire population, including younger people, people starting careers who are leaving with school debt, as well as credit card debt."
Bankruptcy filings during last year's third quarter - the most recent period for which data are available - broke records again, according to the Administrative Office of the U.S. Courts.
Bankruptcy cases for fiscal year 2002 totaled 1.5 million, up 7.7 percent from fiscal 2001. The vast majority are consumer bankruptcies.
The numbers could fuel renewed calls for changes in bankruptcy law, Mr. Gerdano said.
Congress' attempts to toughen federal bankruptcy laws bit the dust last year because Republicans were upset over language that would have prohibited abortion-clinic protesters from filing for bankruptcy to escape court-imposed financial penalties.
The legislation would impose a complicated "means test" that essentially would disqualify those who can repay their debts from filing a Chapter 7 bankruptcy. Opponents say the legislation is too harsh.
People are filing bankruptcy for several reasons.
Among those filing, Mr. Gerdano said, are "people starting families, as well as older people with increased medical debts that are not covered by insurance."
They also include people who've been laid off and workers who no longer make overtime because manufacturing operations have slowed down.
"These are people who relied on additional income to cash-flow their obligations and maintain their lifestyle," Mr. Gerdano said.
Entrepreneurs who financed their start-ups through credit also found themselves in trouble when the ventures failed.
"Because of the free access to credit, people could self-finance that operation," Mr. Gerdano said. "They can do it on a credit card, so there could be a blending of business and personal debt."
But the bulk of debt that consumers are carrying consists of mortgages, he said.
"That's good for the expansion of homeownership, and it allows people to build equity in a home that provides a cushion in financial troubles," Mr. Gerdano said. "However, there's been a substantial growth in cash-out refinancings."
In a cash-out refinancing, borrowers take equity out of the home, boosting their mortgage debt. Some experts worry that homeowners are becoming overburdened with mortgage debt.
Think ahead Ideally you shouldn't spend more than 25 percent of your net income on housing, said Howard Dvorkin, president of Consolidated Credit Counseling Services.
Dallas residents are staying within that parameter, spending an average 25.6 percent of their net income on housing, "which is acceptable in my book," he said.
Overspending on housing and transportation are the two most common causes of people seeking help with their debt, his group's recent survey found.
"When setting a budget, people need to look at the big picture," Mr. Dvorkin said. "Too many people we deal with don't plan ahead. They spend based on what they want at the moment, rather than looking at the consequences down the road."
