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Easy credit terms and a bad economy may be to blame for what are historic highs in personal bankruptcy filings. According to the Administrative Office of the U.S. Courts, a record 1,661,996 bankruptcies were filed in fiscal year 2003, which ended on Sept. 30, an increase of 7.4% from a year ago. Overwhelmingly, those figures represent the travails of individual debtors as commercial bankruptcies accounted for just 2.2% of the new cases. The filing pace for personal bankruptcies is now roughly double what it was 10 years ago. During this time no new bankruptcy judges have been added to the federal bench, creating a work crunch. “The workload is much heavier,” said U.S. Bankruptcy Judge Eugene R. Wedoff, who sits in Chicago, “and that’s true for judges across the country. It’s certainly true for judges in the Northern District of Illinois.” Wedoff said that the extension of consumer credit to people who lack the income to meet their obligations may be to blame for the decade-long increase. The courts’ statistics appear to support that idea. Nearly 71% of last year’s filings were Chapter 7 petitions by debtors seeking to wipe out substantially all of their debts. More than 1.17 million of those cases were filed in 2003, up 8.6% from 2002. Matthew Mason, president of the 1,300-member National Association of Consumer Bankruptcy Attorneys, offered another theory. “Right now, what we’re seeing is the flat-out effects of the economy being bad,” he said. Mason described what he called a typical debtor cycle where home-equity loans are taken out to pay off credit card bills. The borrowers then default on the equity loans because they lack the resources to pay off second and third mortgages, forcing them into bankruptcy. “Layoffs, cutbacks, divorce, accidents, medical bills, all affect people who are right at the edge of their financial resources where it takes just one thing to go wrong and they’re in default,” he said. ‘Unlikely to be a downturn’ While recent government reports assert that the economy is improving, Mason said that “bankruptcy lags the economy” and that there is unlikely to be a downturn in filings until the economy has been strong for a while. He attributes this phenomenon to collection attorneys who press hard to collect debts when debtors are working, as opposed to when they are unemployed. “When people go back to work, there’s something to collect against,” he said. “My firm is filing at an astonishing rate-40 to 80 cases a month,” said bankruptcy lawyer Jeffrey L. Solomon of Garden City, N.Y.’s Steinberg, Fineo, Berger & Barone said. “It’s staggering.” Solomon said that a majority of his cases concern “middle-income families that are in over their heads.” But he also counts among his clients single-income households and dual-income households where one partner has lost his or her job. Echoing Mason, Solomon said that these debtors often take high-interest cash advances to pay their bills and then cannot repay the advances themselves. “They get sucked into a debt structure that they could not get out of even if they were earning at full capacity,” he said. Solomon, too, blames the filing surge on a decline in standards for issuance of new credit cards. Those standards, he said, have decayed “from an analysis of the borrower’s means to credit card arbitrage. Banks actually like it when people pay late,” he said, because it enables them to charge 18% to 25% interest on people who are just making the minimum payments. In contrast to the rising personal filings, business bankruptcies have declined in the past year, the Administrative Office of the U.S. Courts said. Just 36,183 commercial bankruptcies were filed in 2003, a 7.4% drop from 2002′s figure. A bill that would have toughened the standards for granting a Chapter 7 discharge passed in the House of Representatives earlier this year, but no parallel legislation was introduced in the Senate before that chamber recessed for the holiday last Wednesday. Harris’ e-mail address is a[email protected].

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