Isle bankruptcies triple
Filings last month soar to 574 as consumers hurry to file before tighter limits take effect; Requiring repayment and debt counseling is meant to force responsible borrowing
Debt-ridden consumers are stampeding Honolulu's bankruptcy court to beat an Oct. 17 deadline, when a new federal law will make it harder for people to wipe out their credit card debts and other obligations by filing for bankruptcy protection.
The total number of bankruptcies filed statewide in September surged to 574, nearly triple the 204 filed in September 2004, according to preliminary data from the U.S. Bankruptcy Court in Honolulu.
During the quarter ended in September, more than 1,200 people or companies filed for protection in Honolulu. That was a 78 percent increase over the same quarter in 2004.
"Anybody that is in a position where they feel they might have the need to file for bankruptcy is probably going to err on the side of filing now rather than waiting for the new law to pass," said Tom Roesser, a Honolulu bankruptcy lawyer who is president of the Hawaii Bar Association's bankruptcy section.
"We've been seeing three to four times as many people as we generally do," said Dawn Smith, a Honolulu bankruptcy lawyer who said the number of clients she is seeing has risen from six per day, at most, to 15 to 20. "We're basically open all the time now, practically."
The new law makes it harder to file for Chapter 7 bankruptcy protection, which effectively wipes out all debts, by creating a "means test" to determine who is eligible.
Those deemed to have the financial wherewithal to avoid Chapter 7, according to standards outlined in the law, will be forced into Chapter 13 bankruptcy, which requires debtors to establish five-year plans to pay off creditors.
The new law also requires a credit counseling course from a court-approved counselor within six months of filing for bankruptcy protection, and completing a course on personal finance management before exiting bankruptcy.
Adding to the burdens for those seeking bankruptcy as a way to deal with creditors, some lawyers say they likely will raise their fees because the new law requires lawyers to do more legwork before they file a bankruptcy petition, and these extra costs likely will be passed on to clients.
All this has fueled a mad dash to Bishop Street, even though Hawaii's economy is strong, with unemployment hovering near historic lows. Indeed, despite the vibrant economy, the second quarter of 2005 marked the first quarter in three years that bankruptcy filings rose compared with the same quarter the previous year. And the second quarter's 15 percent year-over-year increase was dwarfed by the 77 percent year-over-year increase in the third quarter, which ended yesterday.
As consumers stampede to the courthouse, lawyers are working overtime, and their clients are paying top dollar to get filings in under the deadline. Smith, who said she normally charges $300 to $800 for a routine Chapter 7 filing, plus filing fees of $209, reports hearing of local lawyers charging three times that amount for a simple case.
Smith echoed other critics of the law, saying that it is too harsh on consumers who find themselves lured into debt by aggressive credit card companies. It is a problem especially in Hawaii, Smith said, where many people do not speak English as a first language and fail to understand fully what they are doing. For example, Smith said she had a client who had a monthly income of $400 but still managed to rack up $60,000 in credit card debt.
"Charge cards have made it so easy to charge, but once you've done it, you're in their clutches," she said.
Nonetheless, Smith said the new law will benefit some debt-ridden consumers. For example, Smith said she has advised some clients considering bankruptcy to wait until the law takes effect, because it does not count money paid into 401(k) savings plans as income. That means people will be able to keep paying into those accounts under payment plans established to pay off creditors.
The new law also forces people to consider alternatives to bankruptcy, by requiring credit counseling before filing for bankruptcy protection.
"The new law mandates awareness," said Wendy Burkholder, executive director of the nonprofit Consumer Credit Counseling Service of Hawaii. "I think consumers stand to benefit from any form of education, whether it's coming from the credit card companies, or school education, or taking a course, or credit counseling."
For many people, Burkholder said, counseling is a better, less expensive option. Consumer Credit Counseling Service of Hawaii charges $50 for a 90-minute to two-hour session, which is often enough to get clients on track with a payment plan, Burkholder said. Indeed, she said, only 10 percent of the people she works with are so far in debt that bankruptcy is the only option. Nonetheless, clients make the final call.
"We can't force anybody to go into a debt management plan," said Burkholder, whose organization is close to receiving certification that would make it an official source of credit counseling under the bankruptcy law. "Maybe they'll feel that a Chapter 13 is more viable for them. That will be up to the consumer."
One thing that is far from clear is whether people forced into payment plans will be able to keep up with them.
"Just having a law doesn't mean that all of a sudden people will have all of this money and start paying their bills," Smith said. "It will take the people in government a few years to see that this was an experiment that didn't do what it was intended to do."
Paul Brewbaker, chief economist with Bank of Hawaii, said that enabling creditors to collect debts is not the whole point of the new law. Rather, he said, it is meant to discourage consumers from engaging in risky behavior.
Brewbaker said that bankruptcy needs to exist as an outlet for people who run into bad luck -- a divorce, job loss or other event that puts them in bad financial shape. Without such outlets, Brewbaker said, people would be loath to take risk, and that would be bad for the economy. The same goes for companies taking on debt for capital investments.
The trick, he said, is to calibrate the law so that while it does not make people afraid to borrow money to buy homes, start new companies and the like, it does discourage excessively risky behavior. In that case, there will be fewer people needing bankruptcy protection, because they will not get into bad shape to begin with.
"Suppose (the new law) never did get a dime back (for creditors) from people who were compelled to file for bankruptcy," he said. "That's OK, as long as fewer people end up in that situation where they are exposed to that risk."
