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Bankruptcy Trends: A Perfect Storm of Debt


The housing ATM is simply out of cash with a perfect storm of debt waiting those facing retirement.


The TimesFreePress is reporting on the increase of Boomers now looking to the bankruptcy system for relief. According to the article, the number of bankruptcy petitioners over the age of 45 increased from 27 percent of all filers in 1994 to 39 percent of filers in 2002, according to the study published in the May 2007 issue of American Bankruptcy Institute.

Kyle Weems, a Chattanooga bankruptcy attorney, said, "We've filed many more boomer (bankruptcy) cases recently because of health problems. They have a lot of problems with coverage until they get to Medicare. There's that gap from 50 to 65."

All of this is occurring despite the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, which made it more complicated and more expensive to file for bankruptcy.

According to the article, Tracy Johnson, education specialist with the Consumer Credit Counseling Service in Chattanooga, said, "I don't want to say the (reform) law didn't work, but what the law was intended to do was make people come to a legitimate credit counseling agency and learn their alternatives before they went bankrupt."

It's pretty easy to extend credit at high interest rates if you think chapter seven bankruptcy will be removed as an option. Remember when there used to be credit redlining? Now credit companies go out of their way to solicit those with the worst credit history.

But the law backfired once already with a massive number of filings ahead of bankruptcy reform bill enactment and rates are starting to tick back up again. Since boomers are getting older, people are living longer, and health care costs are soaring I guess this trend should be expected.

Here are a few snips from the American Bankruptcy Institute about the study.

A recent study reveals that bankruptcy filings by older Americans age 55 and over are increasing at a faster rate than the general population. John Golmant and Tom Ulrich, researchers at the Administrative Office of the U.S. Courts, conducted their study by comparing chapter 7 and 13 consumer filing data from 1994 and 2002 to examine how age demographics affect bankruptcy filings. The results of the study are summarized in their article titled "Aging and Bankruptcy: The Baby Boomers Meet Up at Bankruptcy Court," published in the May 2007 issue of the American Bankruptcy Institute Journal.

In conducting their research, Golmant and Ulrich looked to determine the proportion of bankruptcy petitioners that fall within particular age categories and whether these proportions have changed over time. While previous demographic studies primarily relied on survey data to find out more about the filing rates of different age groups, the researchers evaluated actual data from courts and public records available through outside resources.

The study concludes that a number of factors are behind the rising "Baby Boomer" bankruptcy filing rate. Golmant and Ulrich point to the growing amount of mortgage debt carried by older Americans as they tap into their home equity, and rising health care costs as primary reasons behind the growing bankruptcy rate for those 55 years of age and older. Facing reduced income in retirement and escalating health care costs, the researchers said they expect that the increasing bankruptcy filing rates for older Americans will persist into the foreseeable future.

There are numerous articles on the internet referencing this story but no one yet has asked the big question that is on my mind: Why did Golmant and Ulrich stop at 2002? The study missed the recovery after 9/11, the housing boom, and the subsequent housing bust. It would seem the report is five years old the moment it was published. I emailed John Hartgen at the ABI asking for a copy of the study and also asked if there was any hard data from 2002-2006.

Mr. Hartgen responded with a PDF of the study The Baby Boomers Meet Up at Bankruptcy Court but referred me to the authors for additional information. A chart from the article follows annotated in red by me.

It sure would be interesting to see what those numbers would look like with data from 2002-2006. I have questions to the authors of the study about those missing years.

A Perfect Storm of Debt

Although there are no hard numbers from the report for the years 2002-2006 there is plenty of anecdotal evidence about boomer stress in articles such as a Perfect Storm of debt puts Floridians in bankruptcy.

"Mortgage woes, higher gas prices and a "perfect storm" of other financial troubles have caused personal bankruptcies to spike in Central Florida so far this year, according to the latest court records.

Nearly 1,300 personal-bankruptcy cases were filed in Orlando during the first three months of 2007, nearly twice as many as during the first quarter of last year, figures from U.S. Bankruptcy Court for the Middle District of Florida show.

It is true that personal bankruptcies plummeted across the country after the new bankruptcy law took effect. This has been widely reported across most mainstream media outlets. The trouble is, among the many reporting the initial plummet in bankruptcy filings, few have bothered to follow up!

According to the article, this year's first-quarter filings in Florida, while down 60 percent from 2005, to 1,298 cases, are up 97 percent from a year ago.

"There has been a perceptible increase in filings by people who are trying to prevent foreclosure," Jonathan Alper, a bankruptcy lawyer in Lake Mary, told the newspaper. "I don't think we've begun to see the full effect of that."

I suspect we have not seen the full effect yet and that is going to hold back housing prices for years to come. Boomers counting on rising home prices as their retirement funding are going to be facing increasingly difficult times. The housing ATM is simply out of cash with a perfect storm of debt waiting those facing retirement.

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