Amid subprime mortgage meltdown, bankruptcies on rise across state, U.S.

Going broke in 2007 never was more complicated, costly or confusing, yet year-end statistics showed sharp increases in Minnesota and across the nation.

Bankruptcy courts in Minnesota handled 11,795 filings last year. That was nearly a 53 percent rise from the 7,729 cases recorded in 2006, but still fewer than any year from 1988 to 2005.

Area bankruptcy attorneys say they're seeing more mortgage-related financial crises than ever, but they warned against reading too much into the upswing in filings, because changes in bankruptcy laws have affected the numbers since 2005.

"There are so many forces going on, it's hard to isolate them," Minneapolis bankruptcy attorney Curtis Walker said. A similar trend prevailed nationally.

More than 800,000 personal bankruptcy filings were made in 2007, a 40 percent increase from about 573,000 in 2006, the lowest since 1998, according to data collected by the National Bankruptcy Research Center.

The center's data was published by the American Bankruptcy Institute, a research group in Alexandria, Va. Samuel Gerdano, executive director of the institute, said in a prepared statement that the trend is likely to worsen this year, as consumers' high debt loads are "made worse by the home mortgage crisis."

One of the forces to which Walker referred was the 2005 change in federal law. That year saw record bankruptcy filings, in Minnesota and across the nation, as a result of the changes that took effect in October 2005. Throngs raced to court to avoid higher fees and tighter standards for wiping their slates clean of debts.

"They're down, in large part, because the new law made it expensive to file for bankruptcy," Walker said. A typical case now costs $2,000 in legal fees, up from $800 a few years ago, he said.

But bankruptcy specialists expect the number of filings to rise again this year, as growing numbers of Minnesotans find the costs of their subprime mortgages beyond their means. They include families and real estate investors.

"They went in at the wrong time," said Wayne Nelson, a lawyer in Golden Valley.

"[For] a lot of people with rental properties, it's just not working out anymore."

Differences seen

At one extreme, some families let credit card balances pile up -- adding tens of thousands of dollars to their debts -- as they kept current on house payments. They still ended up filing for bankruptcies, but with mountains of unpaid bills higher than what used to be typical, Nelson said.

At the other end of the spectrum, Nelson found more clients willing to give up their houses rather than pay on mortgages that were more than the values of their properties.

"A lot of people are surrendering their properties, as opposed to trying to save them," he said.

Across the nation, many trends played into changes in bankruptcy filings.

Personal bankruptcy filings for most of this decade had been much higher than the 2007 total of more than 800,000 -- around 1.5 million annually. But after an eight-year campaign by banks, retailers and credit card companies, Congress in 2005 passed the biggest changes in U.S. bankruptcy laws in a quarter-century, mandating an income test to measure a debtor's ability to repay obligations.

Consumers deemed to have insufficient assets or incomes can still eliminate debts through a Chapter 7 bankruptcy. But those who have incomes above their state's median who can pay at least $6,000 over five years are forced into Chapter 13, where a debt repayment plan is ordered.

Now the pendulum on bankruptcy law could swing the other way.

As defaults and foreclosures grow, congressional Democrats have been pushing for an expansion of bankruptcy judges' authority to reduce the size of home loans. Under existing law, bankruptcy judges can't modify loan terms on a bankrupt borrower's primary residence, but are permitted to do so for mortgages on second homes.

Democrats say that legislation allowing judges to do so could help more than 500,000 homeowners avoid foreclosures, while Republicans and the mortgage industry say expanding this power would make lenders far more reluctant to extend home loans.