More consumers file for bankruptcy protection (USA Today)

By Christine Dugas, USA TODAY
The economic recovery effort has not slowed consumer bankruptcy filings. They surged 14% in February compared with a year earlier, according to the American Bankruptcy Institute.

The 111,693 cases filed last month also represented a 9% increase from January, the report said.

"The debt-stress overhang from years of consumer spending has a more acute impact now because of troubling economic times," says Samuel Gerdano, American Bankruptcy Institute executive director.

And that financial distress is driving more Americans to file for Chapter 7 bankruptcy, which — if approved — allows a court to discharge most unsecured consumer debt, including credit card bills.

When a stricter bankruptcy law took effect in 2005, a major goal was to require more families to rely on Chapter 13 bankruptcy, which requires filers with regular income to repay debts in full, or in part, over several years.

Yet the number of Chapter 13 filings decreased 3% last month from January, the American Bankruptcy Institute says.

"People generally file for Chapter 13 to try to save a home," says Robert Lawless, professor of law at the University of Illinois.

Before the housing crisis, financially strapped consumers could often avoid bankruptcy by tapping the rising value of their homes and taking out home equity loans. "People have borrowed money to avoid filing for bankruptcy," says Lawless. "When consumer credit tightens up, as we've seen, that does increase the (bankruptcy) filing rate."

Business bankruptcy filings are rising, too. In February, there were 6,557 business filings, compared with 6,390 a year earlier, according to Automated Access to Court Electronic Records.

Gerdano expects that trend to continue, but he notes that business bankruptcies represent fewer than 10% of total filings.

Last year, there were 1.47 million bankruptcy filings, up 32% from 2008, according to data released by the Administrative Office of the U.S. Courts on Tuesday. Chapter 7 filings rose 41% in 2009, while Chapter 13 filings were up just 12%.

The bankruptcy rate has risen each year since the law was changed in 2005. "We are already on a faster pace in 2010 than we were a year ago," Gerdano says. "Consumer filings will likely surpass 1.5 million filings this year."

Grandpa:
We need to whisper here as it appears the main cheerleader financial outlet (a.k.a. CNBC) is not yet aware of the news. They are immersed in “all is good” from the Federal Reserve Beige Book results released today.