State bankruptcy
filings up 18%
for the quarter

The figures are likely to get worse
in coming months, attorneys say

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By Tim Ruel
truel@starbulletin.com

Hawaii's bankruptcy filings jumped 18 percent this quarter, a figure that is sure to get worse in the coming months, attorneys say.

The increase underscores a trend that began in the first few months of the year and signifies that the local economy again slipped -- well before the Sept. 11 attacks -- while Hawaii residents continued to rack up formidable credit card debts.

Chapter 7 liquidation filings, the most common form of personal bankruptcy, were up 20 percent statewide, with 1,048 new petitions filed in the past three months compared with 874 in the same period last year. The figures do not include today's filings, which are the last for the quarter. Chapter 11 business reorganization filings remained flat at 10 filings, compared with 11 a year earlier.

The outlook is worse for the last three months of this year, as rising joblessness may push more local consumers over the edge into bankruptcy protection from creditors. State unemployment offices have been swamped with thousands of workers laid off from Hawaii's hotels and attractions. Tourism, the engine of the economy, is faltering in the immediate aftershock of the terrorist strikes.

For the year to date, Hawaii's Chapter 7 bankruptcies totaled 3,444, up 13.9 percent from 3,024 filings in the same period in 2000. At the same time, less popular Chapter 13 bankruptcies stood at 363 new cases, just up from 359 in the year earlier. With Chapter 7 filings on the rise, the state could see a total of 5,000 new bankruptcy cases by the end of December.

That would mean roughly one out of every 240 local residents filed for bankruptcy this year, given Hawaii's population of 1.2 million people. Those are new cases, since six years typically must pass before someone can file a second time for Chapter 7 liquidation.

The rate is only slightly better than the national average, which is one bankruptcy out of every 190 Americans. Hawaii had one of the lowest insolvency rates in the nation during the state's boom years, experts say.

Among local residents, filing bankruptcy has become less of a stigma, said attorney Dawn Smith, who works with consumers. In fact, going bankrupt is becoming common in Hawaii, she said.

In 1998, the total number of bankruptcies in Hawaii soared to an all-time high of 5,813 filings. In the same year, the nation's bankruptcies hit a record 1.44 million filings, which was primarily driven by heavy consumer spending and credit card debt, according to the American Bankruptcy Institute, based in Alexandria, Va. In 1999, Hawaii's total filings dropped back to 5,411 cases, then fell further in 2000 to 4,527 cases.

The high numbers began returning earlier this year, when bankruptcy attorneys began warning consumers about new federal legislation that would make it harder to walk away from debt under Chapter 7 liquidation. The nation's major credit card companies supported the measures, saying too many people were using bankruptcy irresponsibly to clear out debt while keeping their homes and cars. It was to be the first major overhaul of bankruptcy rules since 1978. In the second quarter of this year, 400,394 bankruptcies were filed nationwide, a new quarterly record and a 25 percent increase from the previous year.

A bankruptcy conference committee had been scheduled to go over the proposals this month in Congress, but the matter was quickly shelved in the wake of the Sept. 11 national emergency.

Meanwhile, bankruptcy continues to rise in Hawaii, a sign that the local economy is slowing and residents are struggling with their bills, said local attorney Ted Pettit, who works on business reorganization cases.

Hawaii's consumer bankruptcies typically stem from high credit card use, among other factors, Pettit said. He sees lots of cases where the owners of a business finance the operations with their credit cards, then file for personal bankruptcy when the company heads south.

For example, a Hilo couple that own the Chalet Kilauea hotel and dining business filed for Chapter 7 bankruptcy earlier this month with personal credit card debts totaling $163,345, documents show. The couple had 14 separate accounts, including American Express, Chase Visa, Citibank Visa, Discover Financial Services and First U.S.A.

That's not unusual, said Pettit, who did not represent the Hilo couple. In other cases, he's seen debtors rack up 30 to 40 separate credit cards.

"They have over $250,000 worth of credit card debt," he said.

Local consumer bankruptcy cases also involve young professionals who purchased leasehold property in West Oahu in the 1990s. The average home there has lost so much market value that the mortgage payments are far more than the property is worth. Bankruptcy is typically a way of ducking foreclosure, but it's also a way of avoiding taxes. When home owners give up and turn their keys in to the bank to terminate a loan without foreclosure, the government still considers the loan as a form of taxable income. That cost alone can be prohibitive, Pettit said.

Another factor in Hawaii bankruptcy is the high cost of living, and the local culture of piling on debt, credit card after credit card, and living on month-to-month income, Pettit said. When the economy turns sour and jobs are lost, it doesn't take long for insolvency to set in. Plus, Hawaii's larger families tend to depend on singular sources of income. If one person loses their job, the whole family can suffer.

The frailty of local consumer habits is underscored by the high failure rate of Chapter 13 repayment cases. Under Chapter 13, debtors are supposed to reimburse creditors out of their future income, but in Hawaii, 80 percent of debtors fail to make the payments, according to Howard Hu, the state's appointed Chapter 13 trustee. The cases are either dismissed or converted to Chapter 7 liquidation. The failure rate on the mainland is slightly better. Hawaii's higher rate is indicative of how little discretionary income the average resident has after expenses, Pettit said.

"It's the fact that they're living so close to the edge," he said.

The best long-term solution for Hawaii is to improve its business climate to create more jobs, Pettit said. Currently, the state is characterized by high taxes, expenses and workers' compensation costs.

"Hawaii continues to be sort of an anti-business climate," he said.