Wednesday, Dec. 5Posted 4 p.m. EST
Forecast: a surge in bankruptcies, an impending credit crisis
Be forewarned, bankruptcies may surge in 2008, says Executive Director Sam Gerdano of the American Bankruptcy Institute, or ABI. And he believes rising household debt and the mortgage crisis are at fault.
Another hint are the latest numbers from ABI, which show that consumer bankruptcies continued to rise compared to last year. November saw a 28 percent increase in filings compared to November 2006.
The most recent numbers reveal a slight lag in filings last month versus October. There were 71,799 filings last month compared to the 75,975 filings in October, ABI reports.
The slight decrease is no surprise to Doug Erickson, director of partner relations at the Consumer Credit Counseling Service, or CCCS, in Atlanta. Bankruptcy filings seem to follow very predictable patterns, he says.
"October and November were tracking to be identical until the Thanksgiving holiday slowed it down. March and October are always the heaviest months. November is lower than October. December will be lighter than November," says Erickson.
The holidays tend to be slow, he explains, partly because of closed offices.
Erickson also noticed the amount of consumers visiting CCCS that were attempting to prove participation in bankruptcy counseling, which is needed to file bankruptcy, dipped between October and November.
"October we issued 20,727 certificates. In November, we issued 18,558," he says. Erickson says the increase ABI reported correlates to what he's seen at the agency.
"In November of 2006, we issued 14,198 certificates," he says.
Lawmakers are determining whether a change in the law may stunt the possible spike in filings related to the subprime mortgage debacle. Senators are hearing from bankruptcy judges, scholars and economists Dec. 5, regarding the question of whether bankruptcy judges should fix mortgages.
Impending credit crisis?
However, Bill Mack, a Beating Bankruptcy blog reader, believes the mortgage crisis is about to be upstaged by a credit crisis. Mack works on a college campus and helps students find financing for their college education.
"The amount of debt [the students] are taking on from private lenders (as opposed to the federal student loan programs) seems to be exploding," says Mack.
He says the students won't be able handle that debt upon graduation, leaving a lot of co-signers responsible.
"Those co-signers will then seek relief from bankruptcy. What they will then discover is that student loan debt, even private student-loan debt, is not usually dischargeable in bankruptcy. The exception is when it is determined by the court that repaying the debt would present an undue hardship to the borrower," Mack says.
He believes bankruptcy courts will begin to find this level of hardship more often, causing lenders and their secondary market investors to pull the plug on these private student loan programs.
Mack predicts that thousands of college students will be unable to pay their college related expenses and enrollments will drop.
Tell us what you think at bankruptcyblog@bankrate.com
I'll have more on the congressional hearings Thursday.
