 By TIM GRANT Pittsburgh Post-Gazette January 26, 2009
The general cause of most bankruptcy filings is too much debt combined with a loss of income related to unemployment, divorce or uncovered medical bills.
States with higher rates of bankruptcies -- Nevada, Arizona, California and Florida -- also are the states with the highest rates of foreclosure. Filings for Chapter 7 bankruptcy, which doesn't require any debt repayment, increased more than 100 percent in Arizona last year. "If you look at the worse hit areas, you had dramatic real estate price escalation; and a lot of that was fueled by speculators flipping houses," said Jim Wallace, a partner with Griffith McCague & Wallace in Pittsburgh. In 2005, bankruptcies hit a historic peak just before Congress passed a reform act to change the bankruptcy code. Bankruptcies soared nationwide as many people with troubled finances rushed to file their applications before the new law pushed more of them out of Chapter 7, which wipes away debt, to Chapter 13, which forces filers to arrange a payment plan to satisfy debtors over a three- to five-year period. "We had 10,000 cases in just a few weeks in 2005," said John Horner, clerk of the U.S. Bankruptcy Court in Pittsburgh. "Compare that to 1997 when we had 11,000 cases for the whole year." But after a dramatic drop in 2006, bankruptcy numbers appear once again to be on a steady climb. Pittsburgh bankruptcy attorney Susan J. Pearlstein points out that bankruptcies don't immediately follow job cuts. "You don't get laid off and file bankruptcy the next day. You have severance pay and unemployment and you think you'll get another job before it runs out," she said. "Bankruptcy takes time. Very few people file the day they get laid off or divorced. Most people want to pay their debts if they can." With more families living paycheck to paycheck after years of irresponsible spending and over-reliance on credit cards and home equity loans, a missed paycheck or two could send them into financial ruin. John Cook, a bankruptcy attorney in McCandless, Pa., said some of his clients were having problems with foreclosure, but that it had less to do with the value of their properties going down and more to do with loss of income. "They're not getting the overtime they used to, or they've been laid off," Cook said. "They've lost the ability to pay the mortgage. "There's a whole lot of reasons why people file. Mainly it's too many credit cards, job loss and health issues."
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