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Business Law column: Bankruptcy filings on the increase

This week: An examination of some recent bankruptcy news and trends.

Both business and personal bankruptcy filings in the United States continue to rise.

Total U.S. bankruptcy cases filed during the first quarter of 2007 increased 65.83 percent over the same period in 2006, according to data released by the Administrative Office of U.S. Courts. There were 193,641 bankruptcy filings during the first quarter, compared to 116,771 cases filed over the same period in 2006. Filings for the first quarter of 2007 also represented a 9.03 percent increase over the 177,599 bankruptcies filed during the fourth quarter of 2006.



Both personal and business filings are up. The first quarter increase in overall bankruptcy filings reflects a 66.27 percent rise in consumer filings, and a 53.7 percent increase in business filings, as compared to the first quarter of 2006.

“Though bankruptcy filings are still low from a historical outlook, new cases are being filed at much higher rates than a year ago, as more households feel the stress of high debt burdens, a trend that is likely to continue,” said American Bankruptcy Institute Executive Director Samuel J. Gerdano.




Medical expense leads to insolvency

When Congress passed so-called bankruptcy reform legislation in 2005, its supporters cited the need to combat bankruptcy fraud. But many experts felt that the majority of bankruptcies were filed legitimately, did not involve fraud, and resulted from job loss or catastrophic illness.

Now, a subcommittee of the House Judiciary Committee is investigating the role that medical debts play in forcing consumers to file for bankruptcy.

The subcommittee held a hearing last week at which a panel of scholars and experts testified concerning the role of medical debts in bankruptcy cases. Professor Elizabeth Warren of Harvard Law School and Dr. David Himmelstein of Harvard Medical School reported on the results of their joint research, which shows that medical debts appear to be the cause of one-half of all consumer bankruptcy filings. Professor Warren and Dr. Himmelstein also told the subcommittee that bankruptcy filings due to medical debts are a troubling trend among middle class Americans, not just lower-income families.

It will be interesting to see whether the demonstrated correlation between medical debts and bankruptcy gives impetus to the various proposals for health care reform.

Debt fuels college dropout rate

Bankruptcy trustee Thomas A. Aceituno gave an eye-opening talk last week to the Sacramento County Bar Association’s Bankruptcy Section. Mr. Aceituno cited statistics showing that more students are dropping out of college due to debt than due to academic failure. He also said that anyone who has not visited a college campus recently would be shocked to see the number of credit solicitations with which students are bombarded.

Mr. Aceituno is involved in “CARE” ” the Credit Abuse Resistance Education Program, started by New York Bankruptcy Judge John C. Ninfo II. CARE provides public education concerning the problems of overuse and abuse of consumer credit.

Bankruptcy judges and attorneys in nearly 40 states (including California) and the District of Columbia have become a part of the CARE Program. Its goal is to educate middle school, high school and college students concerning the consequences of consumer credit abuse. CARE believes that students can avoid credit abuse if they understand the true cost of credit and the dangers associated with incurring high-interest debt.

Information about CARE, as well as the names of local program contacts, are available on the CARE web site, http://www.careprogram.us.

Katrina aftermath

Hurricane Katrina, reportedly the largest disaster in U.S. history, caused widespread property destruction. However, data shows that foreclosure filings in the hardest-hit areas hit were actually much lower, in the year after Katrina, than in the year prior to the storm.

While this may seem surprising, it really shouldn’t be. Studies show that bankruptcy filings normally are suppressed for the first year or so after a disaster, because of lender forbearance and disaster relief aid. However, within about two years after the event, a flow of disaster-related bankruptcy filings often occurs, reflecting the fact that many small businesses and consumers experience financial failure ” largely due to a reduction in population or the loss of job opportunities. It remains to be seen whether the Katrina aftermath will follow that same pattern.

Another mortgage lender goes bankrupt

Alliance Bancorp, a residential mortgage lender in Brisbane, California, has filed for liquidation under Chapter 7 of the Bankruptcy Code. Alliance, formerly known as United Financial Mortgage Corp., filed in Delaware.

Alliance’s chief executive, Lisa Duehring, announced on the company’s Web site that it was ceasing operations on July 13. She said that despite a valiant fight to survive, “the latest market was more than we were able to overcome. We have exhausted our resources and do not have the means to move forward.”

Since the filing is under Chapter 7, not Chapter 11, the company will not seek to reorganize its business. Instead, its assets will be liquidated by an appointed bankruptcy trustee.

Lionel Trains update

As this is written, the bankrupt Lionel Trains company and its litigation adversary, Mike’s Train House (MTH), were reportedly in settlement discussions. Meanwhile, MTH is seeking to offer creditors an alternative bankruptcy reorganization plan for Lionel, in competition with Lionel’s own proposed plan.

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Peter C. Bronson, of Nevada County, is a partner in the Sacramento offices of Kelly Lytton & Vann LLP. His law practice emphasizes creditors’ rights, insolvency, commercial litigation and mediation. Write him at pbronson@klmvlaw.com. This column is not intended as legal advice in any specific business situation or dispute; specific strategic decisions always depend upon the specific facts.


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