Number of cases filed in southeast Michigan jumped 63 percent through October 2007.
Wednesday, December 26, 2007
Nathan Hurst / The Detroit News
DETROIT -- The number of southeast Michiganians declaring bankruptcy is skyrocketing.
Through October, the number of Chapter 7 personal bankruptcies filed in Detroit's federal bankruptcy court jumped 63 percent compared with the first 10 months of last year. With two months of 2007 filings still to be reported, there already are 4,700 more Chapter 7 filings this year than for all of 2006.
Financial experts say the reasons for the recent ramp-up in bankruptcy filings are well-known to many Michiganians.
"It's definitely about the bad economy and housing market," said Natasha Swoish, manager of bankruptcy counseling and education services at GreenPath Inc., a Farmington Hills-based credit counseling service. "Especially from the Detroit area, we're seeing a lot of people coming in because of foreclosure. It's a last-ditch effort to try and save their homes."
Swoish said GreenPath's counselors work with those in debt to set up plans with creditors, rather than defaulting or seeking bankruptcy protection. But lately, she said, that option of last resort has become necessary for those out of work and swimming in debt.
According to court records, 19,345 individuals or married couples filed for Chapter 7 bankruptcy through October, the latest month of data available from the Eastern District of Michigan bankruptcy court, which covers Detroit, Flint, Saginaw and Bay City. That compares with 14,650 for all of last year.
The number of Chapter 13 filings, which allow consumers to reorganize their debt through a court-managed payment plan, stood at 9,902 through October, compared with 8,344 through October of last year.
A similar increase in personal bankruptcies is showing up nationally, with filings up 45 percent during the first nine months of 2007, according to the American Bankruptcy Institute.
Credit becomes necessity
Sara Horton is among this year's Chapter 7 filers.
She and her husband, Ed, have been swimming in medical bills and credit card debt since shortly after their 2001 wedding.
The couple's combined $41,000 income didn't stretch to support themselves and their two children. Credit cards were supposed to be for emergencies only, but just paying the rent and two car payments was stretching their paychecks thin, and every trip to the grocery store or pharmacy turned into an "emergency."
A yearlong stint in Florida didn't boost their income. Earlier this year, the couple gave up their two cars to auction and moved back to Sara Horton's hometown of Owosso with her father.
"We packed up and moved back to Michigan," Sara Horton said. "We gave up the vehicles and ended up filing bankruptcy to get out. We already had creditors calling nonstop and it was too much."
The Hortons filed for Chapter 7 protection in late July. After meeting with a slew of financial counselors, bankruptcy court trustees and creditors, the couple's deepening debt -- an amount nearly double her husband's current $18,000 annual salary -- was wiped away.
But Horton knows her troubles aren't over. For the next 10 years, the Chapter 7 filing will remain on their individual credit reports and can hurt their ability to obtain credit, get a mortgage or rental contract and even raise red flags with prospective employers.
Still, she feels it was the right choice.
"I still believe it was better for us to file than not," Horton said. "It's a clean slate, a chance to make a life for ourselves and more importantly, our children."
More bankruptcies expected
In October 2005, bankruptcy filings in Michigan and across the country soared, as consumers on the financial edge raced to file before implementation of a restrictive new bankruptcy law. Under the reforms that took effect Oct. 17, 2005, it became harder to qualify for Chapter 7 bankruptcy, in an effort to push more people to Chapter 13, which forgives less debt.
After the new law went into effect, bankruptcies dropped off dramatically.
In October 2005, 17,942 consumers filed for Chapter 7 bankruptcy in the Eastern Michigan bankruptcy court. In the following month, it was 213.
The lull lasted until Michigan's auto industry started its historic downsizing, sending the state economy into a tailspin and consumers back to bankruptcy court. With the continued slump in the state's labor and housing markets, experts say to expect more bankruptcies in the coming months.
"The housing market problems and the number of bankruptcies are very closely intertwined," said Mike Kruczek, chief lending officer at Dearborn Federal Credit Union. "They're a symptom of a problem that's incredibly difficult to solve."
Bankruptcy may save home
Experts say some homeowners are using bankruptcy to save their houses from foreclosure, as they struggle to make their house payments amid job losses and climbing interest rates on adjustable-rate mortgages.
They can do that two ways.
With Chapter 7, the bankruptcy court is allowed to discharge debt deemed unmanageable for consumers. Because other debt is forgiven in Chapter 7, it can make it easier for some homeowners to make their house payments and avoid foreclosure.
In the end, though, many who file Chapter 7 will lose their homes because they may already be in arrears on their mortgages before their debt is discharged.
Chapter 13, on the other hand, staves off foreclosure proceedings while the homeowner works out a plan to pay off mortgage debt and other obligations over time -- usually three to five years. To qualify, debtors must have a regular income and must stay current on their new bills.
About four in 10 filers in the Eastern Michigan bankruptcy court filed under Chapter 13 this year -- up from two in 10 in 2005.
While Horton said she believes her decision to file bankruptcy was a good one, financial counselors are still reticent to send consumers packing to the region's bankruptcy court inside the stark skyscraper at 211 W. Fort in Detroit.
"We've noticed a huge surge in bankruptcies," said Kruczek of Dearborn Federal Credit Union. "Thousands of our members have sought bankruptcy counseling this year, but we're trying to give them other options as well."
For many, that option is a nonprofit credit counseling agency, which pairs troubled consumers with experts who mediate between lenders and debtors to reduce interest rates and monthly payments. Some counseling agencies are partly supported by credit card firms and other lenders.
Kruczek said it's important for consumers considering bankruptcy to think about the potential effects, including how long such actions stay on one's credit report.
Entering a credit-counseling payment plan also can tarnish an individual's credit record, though generally not as badly as discharging debt completely.
Filings come with drawbacks
Of course, there are pitfalls. Chapter 7 and 13 filings wreak havoc on the bankrupt consumer's ability to obtain credit. The repayment plans often leave borrowers little room for financial maneuvering, sometimes leading to failure because of unforeseen problems such as an illness or job loss.
Chapter 7 filers face 10 years with blemished credit, while those who choose Chapter 13 are stuck with the scarlet-lettered credit report for seven years in most circumstances, though in some cases it can last for 10.
That was one of the reasons Kathleen Perrilla, a 46-year-old police service aide from Dearborn Heights, elected not to file bankruptcy for the second time three years ago. Her first bankruptcy, which she filed in 2001 after amassing a whopping $180,000 in medical and mortgage debt, was a bust for her personally.
"It was devastating," she said. "I was afraid to tell anyone what happened. I felt so alone."
Shortly after her bankruptcy case closed, Perrilla ran into more medical problems; this time, it was a serious heart condition that required medication and many doctor visits -- plus all the accompanying bills.
But before she joined the queue of bankruptcy filers lining the cold hallways at the bankruptcy court offices, Perrilla decided to seek credit counseling.
"I'm still paying off some of those medical bills," she said. "But I'm feeling better. Nothing feels worse than drowning in debt."
Wednesday, December 26, 2007
Nathan Hurst / The Detroit News
DETROIT -- The number of southeast Michiganians declaring bankruptcy is skyrocketing.
Through October, the number of Chapter 7 personal bankruptcies filed in Detroit's federal bankruptcy court jumped 63 percent compared with the first 10 months of last year. With two months of 2007 filings still to be reported, there already are 4,700 more Chapter 7 filings this year than for all of 2006.
Financial experts say the reasons for the recent ramp-up in bankruptcy filings are well-known to many Michiganians.
"It's definitely about the bad economy and housing market," said Natasha Swoish, manager of bankruptcy counseling and education services at GreenPath Inc., a Farmington Hills-based credit counseling service. "Especially from the Detroit area, we're seeing a lot of people coming in because of foreclosure. It's a last-ditch effort to try and save their homes."
Swoish said GreenPath's counselors work with those in debt to set up plans with creditors, rather than defaulting or seeking bankruptcy protection. But lately, she said, that option of last resort has become necessary for those out of work and swimming in debt.
According to court records, 19,345 individuals or married couples filed for Chapter 7 bankruptcy through October, the latest month of data available from the Eastern District of Michigan bankruptcy court, which covers Detroit, Flint, Saginaw and Bay City. That compares with 14,650 for all of last year.
The number of Chapter 13 filings, which allow consumers to reorganize their debt through a court-managed payment plan, stood at 9,902 through October, compared with 8,344 through October of last year.
A similar increase in personal bankruptcies is showing up nationally, with filings up 45 percent during the first nine months of 2007, according to the American Bankruptcy Institute.
Credit becomes necessity
Sara Horton is among this year's Chapter 7 filers.
She and her husband, Ed, have been swimming in medical bills and credit card debt since shortly after their 2001 wedding.
The couple's combined $41,000 income didn't stretch to support themselves and their two children. Credit cards were supposed to be for emergencies only, but just paying the rent and two car payments was stretching their paychecks thin, and every trip to the grocery store or pharmacy turned into an "emergency."
A yearlong stint in Florida didn't boost their income. Earlier this year, the couple gave up their two cars to auction and moved back to Sara Horton's hometown of Owosso with her father.
"We packed up and moved back to Michigan," Sara Horton said. "We gave up the vehicles and ended up filing bankruptcy to get out. We already had creditors calling nonstop and it was too much."
The Hortons filed for Chapter 7 protection in late July. After meeting with a slew of financial counselors, bankruptcy court trustees and creditors, the couple's deepening debt -- an amount nearly double her husband's current $18,000 annual salary -- was wiped away.
But Horton knows her troubles aren't over. For the next 10 years, the Chapter 7 filing will remain on their individual credit reports and can hurt their ability to obtain credit, get a mortgage or rental contract and even raise red flags with prospective employers.
Still, she feels it was the right choice.
"I still believe it was better for us to file than not," Horton said. "It's a clean slate, a chance to make a life for ourselves and more importantly, our children."
More bankruptcies expected
In October 2005, bankruptcy filings in Michigan and across the country soared, as consumers on the financial edge raced to file before implementation of a restrictive new bankruptcy law. Under the reforms that took effect Oct. 17, 2005, it became harder to qualify for Chapter 7 bankruptcy, in an effort to push more people to Chapter 13, which forgives less debt.
After the new law went into effect, bankruptcies dropped off dramatically.
In October 2005, 17,942 consumers filed for Chapter 7 bankruptcy in the Eastern Michigan bankruptcy court. In the following month, it was 213.
The lull lasted until Michigan's auto industry started its historic downsizing, sending the state economy into a tailspin and consumers back to bankruptcy court. With the continued slump in the state's labor and housing markets, experts say to expect more bankruptcies in the coming months.
"The housing market problems and the number of bankruptcies are very closely intertwined," said Mike Kruczek, chief lending officer at Dearborn Federal Credit Union. "They're a symptom of a problem that's incredibly difficult to solve."
Bankruptcy may save home
Experts say some homeowners are using bankruptcy to save their houses from foreclosure, as they struggle to make their house payments amid job losses and climbing interest rates on adjustable-rate mortgages.
They can do that two ways.
With Chapter 7, the bankruptcy court is allowed to discharge debt deemed unmanageable for consumers. Because other debt is forgiven in Chapter 7, it can make it easier for some homeowners to make their house payments and avoid foreclosure.
In the end, though, many who file Chapter 7 will lose their homes because they may already be in arrears on their mortgages before their debt is discharged.
Chapter 13, on the other hand, staves off foreclosure proceedings while the homeowner works out a plan to pay off mortgage debt and other obligations over time -- usually three to five years. To qualify, debtors must have a regular income and must stay current on their new bills.
About four in 10 filers in the Eastern Michigan bankruptcy court filed under Chapter 13 this year -- up from two in 10 in 2005.
While Horton said she believes her decision to file bankruptcy was a good one, financial counselors are still reticent to send consumers packing to the region's bankruptcy court inside the stark skyscraper at 211 W. Fort in Detroit.
"We've noticed a huge surge in bankruptcies," said Kruczek of Dearborn Federal Credit Union. "Thousands of our members have sought bankruptcy counseling this year, but we're trying to give them other options as well."
For many, that option is a nonprofit credit counseling agency, which pairs troubled consumers with experts who mediate between lenders and debtors to reduce interest rates and monthly payments. Some counseling agencies are partly supported by credit card firms and other lenders.
Kruczek said it's important for consumers considering bankruptcy to think about the potential effects, including how long such actions stay on one's credit report.
Entering a credit-counseling payment plan also can tarnish an individual's credit record, though generally not as badly as discharging debt completely.
Filings come with drawbacks
Of course, there are pitfalls. Chapter 7 and 13 filings wreak havoc on the bankrupt consumer's ability to obtain credit. The repayment plans often leave borrowers little room for financial maneuvering, sometimes leading to failure because of unforeseen problems such as an illness or job loss.
Chapter 7 filers face 10 years with blemished credit, while those who choose Chapter 13 are stuck with the scarlet-lettered credit report for seven years in most circumstances, though in some cases it can last for 10.
That was one of the reasons Kathleen Perrilla, a 46-year-old police service aide from Dearborn Heights, elected not to file bankruptcy for the second time three years ago. Her first bankruptcy, which she filed in 2001 after amassing a whopping $180,000 in medical and mortgage debt, was a bust for her personally.
"It was devastating," she said. "I was afraid to tell anyone what happened. I felt so alone."
Shortly after her bankruptcy case closed, Perrilla ran into more medical problems; this time, it was a serious heart condition that required medication and many doctor visits -- plus all the accompanying bills.
But before she joined the queue of bankruptcy filers lining the cold hallways at the bankruptcy court offices, Perrilla decided to seek credit counseling.
"I'm still paying off some of those medical bills," she said. "But I'm feeling better. Nothing feels worse than drowning in debt."
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