More Montanans Seek Bankruptcy Protection

By Robert Struckman, 10-02-08

Mortgage resets, the rising cost of food and fuel and the slowdown in the housing market have pushed personal bankruptcy filings to nearly double the numbers from two years ago, according to numbers from the U.S. Bankruptcy Court in Butte.

In the first nine months of 2008, there were 1,140 new Chapter 7 bankruptcy filings, up from 664 over the same period two years ago.

The most dramatic increase has been in the past few months, especially in September, said Lynn Myers, chief deputy clerk at the state’s bankruptcy court.

“We had 25 cases open up in one day,” Myers said. “We haven’t seen something like that since October in 2005.”

Bankruptcy lawyers and trustees say one big recent development is the number of small contractors on the brink, many of them homebuilders whose finished homes are stagnating on the market.

“I’m talking to small contractors,” said attorney Gary Wolfe of Missoula. “Maybe they build three, five, 10 houses a year. What they’re finding is that nothing is selling. They’re in trouble. How far can you reduce your prices before you go into the tubes yourselves?”

The balance sheets on most of the filings tell the familiar mean story of essential expenses covered by debt, as a person or family exists on the financial edge—until some event, such as a medical emergency or the disappearance of a home equity loan, pushes them over.

“Frankly, people were using home equity loans and that sort of thing to pay off debt. The real estate market has topped off and gone down, and that option has been taken away,” said Harold Dye, a bankruptcy lawyer in Missoula.

The developments this year are difficult to compare to the most recent downturn in 2001 and 2002 because bankruptcy laws changed in 2005.

In 2002, for instance, 3,639 Montanans sought personal bankruptcy protection, which was a bit above average for the early part of this decade. The new rules made filing for bankruptcy harder and more expensive and cumbersome, and in late 2005, when they went into effect, filing numbers dropped off precipitously.

These days, at law firms like Wolfe’s in Missoula, it almost feels like old times.

“Oh, it’s busy again,” Wolfe said. “I think it’s the whole economic downturn. Wages aren’t keeping up with expenses, and everybody’s pretty much maxed out.”

“It’s picked up dramatically. I’m seeing people making choices between paying credit card bills and their mortgage and keeping food on the table,” said paralegal Kathy Glover of the Duncan Law Office in Helena.

“They refinanced the home maybe two years ago or a year ago thinking somewhere down the line they could afford the payment, but when the interest rates jump, incomes haven’t increased. But bills have. Gas and good has,” Glover said. “It’s really unfortunate. Everyone’s in the exact same position. They’re struggling. Trying to make ends meet.”

Lawyer Mark Hilario sees the same in Billings, although he blames the regular precariousness of the working poor.

“It doesn’t take much,” Hilario said. “You get sick, break an arm, and you’re not making it.”

Like most professionals in the bankruptcy field, Hilario is no fan of the new bankruptcy rules, which the credit card industry lobbied hard for. “It’s punitive and cynical and typical of the way large banks view debtors.”

Some, like Missoula bankruptcy lawyer Edward Murphy of Missoula, said the worst is yet to come.

“The big threat is yet to come. The consumer is getting weaker here, just like they are all over the country, and small businesses will be the first to go,” Murphy said. “I’m talking to a lot of small businesses in a weak condition, without a lot of cash flow.”

“As far as the number of Chapter 7 cases? The number of cases I’ve filed so far this year is about double any prior year in my career,” Murphy said.

“Gas prices are killing people,” Wolfe said. “Food prices are killing people.”