Bankruptcies After declining in 2000, the number of bankruptcies filed by Hawaii residents so far is up this year, spurred by pending federal legislation that would tighten the requirements for clearing debt.
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First-quarter filings jump
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as stricter new regulations loomBy Tim Ruel
Star-BulletinThe state's Chapter 7 liquidation filings are poised to jump 7 percent in the quarter that ends on Friday from the year-earlier quarter, according to preliminary figures from the U.S. Trustee's office in Honolulu.
As of March 20, total Chapter 7 filings statewide stood at 979, up from 916 at the same point last year. That amounts to about 17 people filing bankruptcy every business day this year in Hawaii.
"We've had a substantial increase," said Greg Dunn, who is one of the state's busier bankruptcy attorneys.
"Just in the last two weeks, we've filed about 60 cases," he said. The increase triples Dunn's rate of 15 to 20 cases in a normal two-week period.
The rise abruptly halts last year's brief trend of decreasing bankruptcies, following improvement in the state economy. In the first quarter of 1999, Chapter 7 bankruptcies topped out at a record 1,227.
Bankruptcy attorneys, however, warn that the current increase will spill into the next two quarters, both in Hawaii and nationwide.
The driving force is the imminent overhaul of federal bankruptcy guidelines, a four-year effort that is likely to make filing for Chapter 7 more difficult later this year.
The U.S. Senate voted 83-15 earlier this month to approve the Bankruptcy Reform Act, with both of Hawaii's senators voting in favor. Because of differences with a similar bill already passed in the House, a conference committee must go over the bill, and President Bush has pledged to sign the compromise version. Former President Clinton vetoed the last bankruptcy overhaul measure, saying it did not adequately protect debtors.
The new legislation would take full effect within about six months of Bush's signature.
Nationally, bankruptcy attorneys have hurriedly placed large ads, telling consumers that it may soon be their last chance to file Chapter 7. The ads have not caught on in Hawaii, but they may not be necessary. Dunn said nine of every 10 of his recent clients said the legislation is why they are filing now.
"People don't want to take chances," he said.
Credit card companies claim current rules are unfair to them by allowing wealthy cardholders to rack up credit card bills, then file Chapter 7 to clear debt quickly and easily while keeping expensive homes and cars.
The number of personal bankruptcies nationwide has nearly doubled in the past decade, to 1.2 million in 2000 from 700,000 in 1990, according to the Administrative Office of the U.S. Courts. However, filings have fallen from a peak of 1.4 million in 1998, mainly due to fewer Chapter 7 personal bankruptcies.
Credit card companies have been the major supporters of the new legislation, which would make Chapter 13 bankruptcy the only option for those above a certain income level.
Chapter 13 bankruptcy forces filers into a long-term plan to pay off their creditors out of future income. As a result, the filer stays in bankruptcy for up to five years before debt is wiped clean.
Chuck Choi, a local bankruptcy attorney, said the new law is simply meant to keep people from filing for any kind of bankruptcy protection, and would be especially hard on Hawaii residents.
"More than 90 percent of the consumer debtors that I have represented would not be served by filing a Chapter 13," Choi said. "They need to file a Chapter 7 and cannot afford to pay their creditors part of their income under a Chapter 13 plan.
"People don't want to be in bankruptcy that long."
As of March 20, 93 people in Hawaii had filed Chapter 13 bankruptcy this year, down from 123 in the year-earlier period.
Making matters more confusing, it is unclear exactly who in Hawaii would be able to file Chapter 7.
"There's going to be quite a bit of confusion and additional burdens placed on the bankruptcy court, the U.S. Trustee's office and practitioners," Choi said.
In general, an income of $50,000 appears to be the dividing line for those who can file Chapter 7 and those who have to file Chapter 13, although there may be exceptions, Dunn said.
Dawn Smith, another local bankruptcy attorney, said $50,000 is unreasonable for Hawaii. She has seen many local families who make that much but can't pay their bills.
Uncertainty over the new legislation has been pushing those who have considered filing bankruptcy over the edge, driving up the state's numbers, Smith said.
That's ironic, she said, since the new law is meant to keep so many people from filing. The increase in bankruptcies also comes at precarious time for Hawaii, amid nationwide corporate layoffs, drops in the stock market and other warnings of imminent slowdown in the U.S. and Japanese economies.
"It's just the worst possible timing," said Smith.
A glance at various types of bankruptcies: The rules
of bankruptcy>> Chapter 7 is often called "liquidation" or "straight bankruptcy." Assets not exempt from creditors are collected and liquidated. Proceeds are distributed to creditors by an appointed private trustee.
>> Chapter 11 bankruptcy allows businesses and individuals to reorganize their financial affairs by making payments to creditors via a reorganization plan.
>> Chapter 13, often called wage-earner bankruptcy, is used primarily by individuals to reorganize their financial affairs under a repayment plan that must be completed within five years. To be eligible for Chapter 13, a consumer must have regular income and may not have more than a certain amount of debt.