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Bankruptcy Filings at Five-Year High, Led by Chapter 7s

Bankruptcy Filings at Five-Year High, Led by Chapter 7s

Mary Pat Gallagher


The number of bankruptcies filed nationwide last year was the most since 2005, driven mainly by increased Chapter 7 filings, and New Jersey had one of the biggest boosts overall, according to the latest federal judicial figures.

But the increase does not necessarily translate into more business for lawyers, as so many of them are vying to get a share of the work.

The 1,656,340 petitions filed nationally in 2010 was 8 percent higher than the 1,575,624 in 2009, though well short of the record-breaking 2,078,415 in 2005. The majority of bankruptcies last year, 1,139,601, were Chapter 7s, according to figures released Feb. 15 by the U.S. Administrative Office of the Courts.

In New Jersey, bankruptcies rose 14 percent from 2009 to 2010, from 36,240 to 41,366, of which 31,879 were Chapter 7 filings.

Only 10 of the 94 districts saw a bigger bump than New Jersey and seven of them are part of the Ninth and Tenth circuits in the West.

The largest rise, 36.2 percent, was in the Southern District of Florida, and the sixth-largest, 18.9 percent, was in the Eastern District of Pennsylvania.

New Jersey’s Chapter 7 petitions for 2010 are the highest in the past decade, other than 2005, when a record 37,397 were filed as debtors scrambled to get in the door in advance of a change in the law that imposed a means test. That total was more than 35 percent above the 27,604 the year before.

New Jersey filings for all chapters totaled 49,583 in 2005.

The means test was one of many changes enacted as part of the Bankruptcy Abuse Prevention and Consumer Pro-tection Act of 2005. It was meant to cut back on Chapter 7 filings and push people into Chapter 13, where they would have to come up with plans to repay their debts rather than erase them.

The swell of Chapter 7 filings in advance of the legislation was followed by a sharp drop to 8,126 in New Jersey for 2006. They bounced back to 12,411 in 2007, and have climbed steadily since: 18,377 in 2008, 27,485 in 2009 and 31,879 last year.

The overall number of cases in New Jersey last year, 41,366, was essentially the same as before the 2005 spike, 41,253 in 2004.

Chapter 7 cases, however, now constitute a greater portion of the whole. While they made up 67 percent of all cas-es in 2004, they now comprise 77 percent.

Consumer bankruptcy lawyer Martin Wolf says that though bankruptcies are up, business is not necessarily boom-ing because so many more lawyers have flooded the practice in response to economic conditions.

“Everyone and their mother has now gone into the field,” says Wolf, a Newark solo and co-chair of the New Jersey branch of the National Association of Consumer Bankruptcy Attorneys.

In his view, many newcomers are “amateurs” who are not up to the task.

Inexperienced lawyers are less likely to push back against Chapter 7 trustees who have become more aggressive in hunting down assets, says Wolf, who has been practicing bankruptcy law in New Jersey since 1995.

They are also more inclined to file petitions when it might be in the interest of the client to hold off, he says.

For instance, it makes sense for people who are underwater on their mortgages and facing foreclosure to postpone Chapter 7 until after the sheriff’s sale so the sale costs can be discharged along with the rest of their debts.

“If they file too soon, they will still be on the hook for expenses from the foreclosure because title is still in their name,” says Wolf.

High volume and recent concerns about the integrity of foreclosure proceedings have slowed things down recently, says Wolf. As a result, even though he has seen an uptick in clients, he is filing fewer cases.

The same concerns about filing too soon apply to people who expect to keep running up debt because they do not have a job or health insurance, says Wolf.

Based on his experience, that means that as high as the number of Chapter 7 debtors now is, additional people need to file and could satisfy the means test but are waiting until they get back on their feet before wiping the slate clean.

Gary Norgaard, of Stern, Lavinthal, Frankenberg & Norgaard in Englewood, notes that filing prematurely can be costly because debtors cannot file another Chapter 7 for eight years.

He also points out that the 2005 law made filing bankruptcy more expensive; lawyers are charging more because they have added obligations and clients also have to pay to satisfy new counseling requirements. The added expense is probably deterring some debtors who would otherwise file, in his view.

Norgaard says has not seen cases delayed by the increased filings.

“We have the capacity to deal with it,” Chief Judge Judith Wizmur, based in Camden, says about the filing in-creases. She notes that the district is fully staffed with bankruptcy judges and, in any event, most work in consumer cases is handled by the panel of Chapter 7 trustees, whose numbers have remained fairly constant.

Arthur Abramowitz, of Cozen O’Connor in Cherry Hill, who chairs the State Bar Association’s Bankruptcy Section, says business filings have been flat or negative. For example, Chapter 11 cases in New Jersey fell from 432 in 2009 to 345 in 2010, a 20 percent drop.

Wolf says companies are filing in other districts instead.

He also notes an accelerating trend of businesses that enter Chapter 11 being less likely to reorganize and emerge as going concerns. Many are forced to convert to Chapter 7 or liquidate because lenders are less willing to loan them money, says Abramowitz.

  1. July 11, 2011 at 4:54 am

    I read blog comments daily. It may not be until the next day, or even a day or two after that, but I do go back and look at comments for the last few days. I don’t, however, subscribe to the comment feed. I suppose I should, but the feed is long enough as it is. Awesome posts with great insight. Thank You for the great read…

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