Personal bankruptcies
up 11 percent so
far this year

Consumers seek to file now,
anticipating stricter federal
rules in the near future

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By Tim Ruel
truel@starbulletin.com

Personal liquidation bankruptcies in Hawaii rose almost 11 percent in the past three months as consumers tried to beat changes proposed for the nation's bankruptcy laws.

Chapter 7 filings statewide totaled 1,211 for the months of April, May and June, up from 1,094 cases filed in the same period last year, according to figures released Friday from the U.S. Trustee's office in Honolulu.

Bankruptcies in Hawaii declined last year, but started rising again earlier this year as both houses of the U.S. Congress passed bankruptcy measures that would make it more difficult to file Chapter 7.

Known as straight bankruptcy, Chapter 7 cases typically allow people to walk away from their debts quickly and easily.

The proposed changes would require more debtors to file for Chapter 13 bankruptcy, in which people repay creditors out of future income under a supervised plan for up to five years.

Supporters of the changes, backed by the nation's major credit card companies, argue that the current laws allow too many people to clear their credit card debts scot-free.

More than 1.27 million Americans filed bankruptcy between March 2000 and March 2001, up 37 percent from 927,916 in the same period in 1996, according to the Administrative Office of the U.S. Courts.

Bankruptcy in Hawaii First six months of the year:   2001 2000 1999 Ch. 7 2,396 2,150 2,606 Ch. 11 7 8 17 Ch. 13 242 246 210 Total 2,645 2,404 2,833 Source: Office of the U.S. Trustee

Those who oppose the changes argue that credit card companies are trying to make it harder for people to get any kind of bankruptcy protection, while at the same time the companies mail out masses of credit card applications to virtually anyone.

A chief issuer of credit cards, Delaware-based MBNA Corp., was the largest corporate contributor to the campaign of President Bush, who has pledged to sign the bankruptcy legislation if it clears a House-Senate conference later this year. Former President Clinton vetoed an identical bill in his final weeks in office, calling it too tough on debtors.

Several Honolulu bankruptcy attorneys oppose the new measure, including Donald Spafford Jr., who thinks it favors credit card companies over consumers. "I think it's too one-sided," he said Friday.

The changes would also add unnecessary burdens to the U.S. bankruptcy system, Spafford said.

Historically, about 80 percent of Chapter 13 bankruptcies in Hawaii end in the failure of the debtor to keep up with payments, said Howard Hu, who has been Hawaii's Chapter 13 trustee since 1982. The mainland has a slightly better rate, said Hu, who is appointed by the U.S. Trustee's office.

Chapter 13 cases that fail are either dismissed or converted to Chapter 7. It's a waste to push more people into Chapter 13, Spafford said.

Ironically, bankruptcy filings have reached near-record numbers nationwide this year as bankruptcy attorneys have pushed their clients to file before the rules change.

Nationally, there were 366,841 total bankruptcies during the first three months of this year, making it the third-highest quarter for bankruptcies in U.S. history. The highest was 373,460 bankruptcies in the second quarter of 1998. The second highest was 367,168 in the second quarter of 1997. Figures for the first half of this year are not yet available nationally.

In Hawaii, Chapter 7 bankruptcies for the first half of the year were at 2,396, up more than 11 percent from 2,150 in the first six months of 2000. The number is still short of the 2,606 bankruptcies filed in the first half of 1999, when the state's economy was still in the doldrums.

Meanwhile, Hawaii's Chapter 13 filings for the first six months fell slightly to 242 from 246 last year.

Chapter 11 bankruptcies, primarily used by companies to reorganize their finances without the threat of lawsuits, stood at seven for the first half of this year, down from eight in the same period last year, and down significantly from 17 in the first half of 1999.