Richard N. Gottlieb Process ‘evenhanded’
Bankruptcy filings in the United States fell 5 percent to just more than 1.25 million in 2000, a continued decline for the second consecutive year from the 1998 all-time high of 1.44 million.
In Massachusetts, the 2000 bankruptcy rate fell 16 percent to 15,601 filings from 18,600 filings in 1999.
While that generally is good news, the national rate is still 6 percent higher than five years ago, when filings first passed the 1 million mark.
“Any decline in personal bankruptcies is likely to have been due to improved economic conditions over the last few years increasing the system tolerance for personal debt,” said Richard De Lotto, research analyst with Gartner Financial Services, a Connecticut-based research and strategy consultation firm.
De Lotto also credits the downward trend to the plethora of credit consolidators that have emerged.
“More people are trying to deal with their debt burdens without the necessity of a bankruptcy filing,” said Richard N. Gottlieb, a Boston-based attorney specializing in business and consumer bankruptcy law.
The numbers decreased substantially in Massachusetts due, in large part, to successes in the high-tech Route 128 and Interstate 495 belt. “What you’re seeing is more people are both benefiting, and to some degree suffering, from the rises and falls in the high-tech economy,” said Gottlieb.
However, with the recent spate of high-tech failures, Gottlieb said he expects to see more people filing for bankruptcy.
“I will tell you that I have started seeing a substantial rise in the number of filings that I’ve been doing, particularly in the area of Chapter 13, which are usually homeowner-based [cases],” he said.
There are two predominate forms of bankruptcy for individuals, Chapter 7 and Chapter 13.
“Chapter 7 is an asset-based form of bankruptcy. That is, what drives the distribution of money to creditors is the liquidation of those assets of the debtor that have a substantial value in excess of encumbrances, mortgages, liens and the like,” said Gottlieb. In Chapter 7, debtors are allowed to set aside exemptions such as a house. “So that when he or she exits the bankruptcy process, they are not left essentially wards of the state,” he said.
Gottlieb calls Chapter 7 a bit of a “Swiss cheese” discharge in that there are 18 different categories of debt which cannot be discharged, ranging from fraud to alimony and child support. Additionally, in this form, applicants cannot cure a default on a mortgage.
Chapter 13, however, is based on income. What drives the distribution of money to creditors is the application of a portion of the debtor’s future income to pay back creditors. To many, this is the more desirable form of bankruptcy, Gottlieb said.
In the last year, there were 859,220 Chapter 7 filings and 383,894 Chapter 13 filings nationally. If the economy continues on a downward trend, the number of bankruptcies could again begin to rise, he said.
“People who before would never have even contemplated a bankruptcy filing are now going to be staring down mortgage foreclosures and lawsuits, essentially because their incomes have gone down because of layoffs or cutbacks in overtime or, worse yet, illness. They’re going to be left in a very bad situation where the only alternative they’re going to have is the protection that’s provided under the federal bankruptcy code.
“Right now the bankruptcy process is fairly evenhanded, particularly in the area of Chapter 13,” Gottlieb said.
Financial Waterloo
Last week, however, a bankruptcy reform bill was passed by the U.S. House of Representatives and is expected to pass quickly through the Senate. Depending on with whom you speak, the law either makes it more difficult for individuals to discharge their debts or closes loopholes through which community banks were losing thousands of dollars in non-collectable debt.
Despite predictions that the region will probably not see a recession, even a soft landing could result in a spike in the number of business and individual bankruptcies, Gottlieb said, especially in the Internet and high-tech sector.
“If this continues, it’s inevitable that you’re going to see more people who were previously living the high life as perceived Internet millionaires suddenly knocking on the door of the United States Bankruptcy Court here in Boston, because they bought the big house in Weston [or] they purchased the BMW believing they had the wealth that came from their six-figure salaries and their multimillion stock options, only to wake up one morning and find that the stock market did to them what [the Duke of] Wellington did to Napoleon at Waterloo,” he said.
More middle-income people are also filing for bankruptcy, said Gottlieb. The rate of bankruptcies in those cases is largely related to the ease with which credit is granted to marginally creditworthy people, he said.
“Thirty years ago, if you wanted a credit card, you had to file a detailed application, meet in person with the officer, provide numerous references, have your application reviewed by a committee and then maybe you might get a Visa card with a credit limit of $1,000. Nowadays, whether they are creditworthy or not, [people] are literally being solicited night and day to buy this or that bank’s credit card,” he said.
“Clearly there’s some frustration on the part of consumers to the solicitations … but really in the last couple of years, the credit card companies and the banks that offer [credit cards] have been more selective and reduced the number of solicitations they have been doing,” said Daniel J. Forte, president of the Massachusetts Bankers Association.
“It’s a legitimate issue, and the industry has tried to respond,” he said, pointing out that a number of the credit card solicitations to which Gottlieb referred come from the credit card industry and not Massachusetts bankers.
“Until and unless there are reductions in the amount of credit outstanding, particularly to those people who really should not be getting it in the first place, you will not reduce the number of filings,” said Gottlieb.
