More Minnesotans going broke; others can't afford it

Many Minnesotans have gone from chasing easy credit to being chased by creditors into bankruptcy court.

Others can't make that move as hard-pressed debtors discover that the cost of declaring they're broke has more than doubled.

Propelled by rising debt and falling home values, Minnesotans are filing for Chapter 7 or Chapter 13 protection from creditors in far larger numbers than last year. Their ranks have climbed by 60 percent so far this year, compared with the same period in 2006. Nationally, bankruptcy filings rose 66 percent during the first three months of 2007.

Some of this year's rise in filings may be the bounce off a floor. Last year, in the aftermath of sweeping changes in federal bankruptcy laws that took effect in fall 2005, the number of filings was the lowest in years.

In a strange twist, some lawyers say the number of bankruptcy filings this year is artificially low because the new code puts the cost of filing beyond the reach of many low-income families.

"One of the intents of the law is to lower the number of bankruptcies," said Jack Prescott, a New Brighton bankruptcy lawyer. "One way to do it is to make it too expensive to file. The lowest-income can't afford to pay for a lawyer."

Supporters of the new law had said the system was being abused. Critics disputed that and said the changes would hurt people hit by serious illness or other severe difficulties.

Mortgage market a factor

In years past, the most often-cited forces behind bankruptcy filings were layoffs, divorces or unexpected medical bills. The troubled mortgage market now leads the list, experts say.

Wayne Nelson, a Golden Valley bankruptcy lawyer, describes his typical client these days as "the middle-class person who gets the first, second and sometimes a third mortgage."They use some of the mortgage to pay off credit card debts," he said "Then two years later, the [mortgage] rates are up and they owe new balances on their cards."

Michael Hoverson, a Minneapolis bankruptcy attorney, said he has grown accustomed to clients telling tales of adjustable-rate mortgages (ARMs) soaring by $500 a month, or mortgage balances that suddenly are higher than the value of the house.

"One in every three or four people is in here because of mortgage foreclosures or ARMs where their payments are up significantly," he said.

Credit problems herald the end of the era when debtors worked their way out of trouble with the help of falling interest rates and rising home values, Hoverson and others said.

Still fewer than in past

Despite the surge in foreclosures nationally, economists who carefully watch credit markets hesitate to predict whether the troubles of U.S. mortgage markets will increase bankruptcies significantly in the years ahead.

"The level of filings still is low by historical standards," noted Mark Zandi, chief economist of economy.com, a website that analyzes credit markets and other aspects of the U.S. economy.

Indeed, while levels of bankruptcy filings are up sharply in Minnesota, they're nowhere near the totals in the years that proceeded the change in bankruptcy laws.

What's more, the delinquency rate on residential mortgages stood at 1.99 percent in the second quarter of this year. That's less than half the level common in the 1990s and 1980s.

"We'll see how many find refuge in banks to avoid foreclosures," Zandi said. "That might drive up bankruptcy filings in a year or two."

In the meantime, many low-income families are finding that the cost of declaring bankruptcy in a federal court is beyond their means. The standard fees of Twin Cities bankruptcy lawyers for filing a case are close to $2,000 -- more than double the rate before the new law took effect.

"Literally, people can't afford to file for bankruptcy," said Curtis Walker, a Minneapolis bankruptcy lawyer who has handled more than 30,000 cases.

Prescott agreed.

"Probably a third of the cases that normally would file are not filing," he said. "It's gotten too expensive."

Mike Meyers • 612-673-1746

Mike Meyers • meyers@startribune.com