Going legally broke has made a big comeback -- especially in the Los Angeles area -- despite a mid-decade revision to the U.S. Bankruptcy Code intended to curb filings.
The number of Southern Californians seeking bankruptcy protection nearly doubled in 2008 from 2007 in the U.S. Bankruptcy Court's seven-county California Central District, by far the biggest increase in the nation.
Bankruptcy is still booming. Personal filings from January through April, the most recent month available, rose 75% in the Central District compared with the year-earlier period.
Bankruptcy experts attribute the growth mainly to the mortgage meltdown, which hit the region's adventuresome borrowers particularly hard. Add soaring credit card debt and medical expenses, and people who never thought they'd see a bankruptcy courtroom are lining up with petitions in hand.
"California has been one of the biggest climbers in the filing rate in the last few years," said Robert Lawless, a law professor at the University of Illinois and contributor to the Consumer Bankruptcy Project, which examined how the 2005 bankruptcy overhaul affected filers. "I attribute a lot of that to the foreclosure problem."
The scene plays out weekdays in the downtown Los Angeles bankruptcy filing office.
In 2006 and 2007, with bankruptcy filings in the doldrums, official statistics indicate this room was less than bustling. But on a recent morning, nearly 20 people were waiting in the hallway before the doors opened, many looking for a way out of their mortgage troubles.
Kim Smock raced in to ask a clerk: "Do you think I can make an 11:30 sale?"
It was 10:45 a.m. and Smock had only 45 minutes to stop the foreclosure sale of his home.
In short order, Gerri Colwark arrived for a similar reason -- the bank was ready to sell her father's foreclosed home that morning. A bankruptcy filing stops a foreclosure sale, at least temporarily, even if the paperwork is stamped only a minute before the sale is to take place.
"I rushed over here," she said, a bit out of breath.
The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 was designed to keep people who had the ability to pay debts from enjoying the benefits of bankruptcy. At the heart of the changes is a complex "means test" to analyze a person's ability to pay debts before being allowed to seek Chapter 7 bankruptcy protection, which along with Chapter 13 are the types most often used by individuals.
"Too many people have abused the bankruptcy laws," President George W. Bush said as he signed the measure into law. "They've walked away from debts even when they had the ability to repay them."
But Lawless, citing studies, said the revisions mainly confused legitimate filers and led to higher attorney fees.
"The effect was that people are arriving in Bankruptcy Court in worse financial shape," he said.
U.S. Bankruptcy Court Judge Maureen Tighe, based in the Woodland Hills division, said the more complex rules ultimately stopped few bankruptcies.
"The changes just made it more expensive for people to file," she said.
The 2005 revamp immediately cooled the bankruptcy frenzy.
In 2004, about 60,300 people sought Chapter 7 or 13 bankruptcy in the district, which covers Los Angeles, Orange, Riverside, San Bernardino, Ventura, Santa Barbara and San Luis Obispo counties. In 2006, the first full year under the new rules, about 17,600 people filed, down 71% from two years earlier.
Nationwide, filings fell less dramatically, 61%, to 612,000 in 2006 from 1.6 million in 2004.
Before long, filing rates were rising again as more and more people were resorting to bankruptcy. Last year, about 65,000 Southern Californians filed, sailing past the 2004 level.
The typical consumer bankruptcy filer isn't a scofflaw, Harvard University law professor Elizabeth Warren said.
"They have decent educations and they once had good jobs," said Warren, whose public profile has soared recently as chairwoman of the congressional panel monitoring the Treasury Department's distribution of bailout money through the Troubled Asset Relief Program.
"Nearly all of them are shocked that play-by-the-rules people like themselves have ended up in bankruptcy," Warren said.
The reason most turn to bankruptcy strikes close to home.
"It's real estate," said Encino bankruptcy attorney David S. Hagen, who conducts free seminars for homeowners organized by the nonprofit Neighborhood Legal Services.
"People got sold a bill of goods on some kind of nontraditional mortgage and thought they could change it when the worth of their house went up. But the worth went down and the payments went up," he said. "They start to live off of their credit cards."
By the time Norris Daniels of Sherman Oaks made it to the self-help desk staffed by Neighborhood Legal Services at the Woodland Hills Bankruptcy Court division, he had racked up $47,000 in credit card debt.
His house troubles consisted mostly of storm damage repairs that spiraled out of control. The house eventually sold, but then came a divorce and support for his mother when she was ill.
According to a recent study by Harvard researchers, doctor and hospital bills plus other costs because of illness contribute to about 60% of bankruptcies.
"I was a person with a good credit score -- 750 -- when I bought my house," said Daniels, 42, a salesman at a Beverly Hills clothing store. "I'm a regular guy."
An attorney wanted to charge Daniels about $3,000, which he couldn't afford on top of the $299 court filing fee. So, like approximately 25% of local Chapter 7 filers, he'll represent himself. (Those who file for Chapter 13 bankruptcy usually need a lawyer's help.)
The complications of the 2005 revisions caused attorney fees to increase to about $1,200 and higher for a Chapter 7 filing. Before that, lawyers charged about $800, Tighe said. Lawless estimated that attorney fees had risen about 50% nationwide.
Chanese Cole, a medical administrative assistant, was one of the people sitting quietly at the downtown Los Angeles filing room, waiting for her turn to be called.
"I can't afford a lawyer," Cole said. Instead, she paid $200 to a bankruptcy petition preparer -- a job title for which no certification or license is needed -- to help her fill out the paperwork.
She had a $23,000 judgment against her because of an auto accident more than 10 years ago. If Cole did nothing, her wages would be garnisheed for a long time to come.
"I never thought I would experience something like this," she said. "It's kind of nerve shattering."
A Chapter 7 bankruptcy normally doesn't reduce secured debt, such as a mortgage. So, even though it stops foreclosure proceedings, that's only temporary; many who file end up losing their homes. Other debts a bankruptcy usually can't wipe out include alimony, child support and student loans.
And the person filing probably won't obtain credit for a long time. A bankruptcy stays on a credit report for 10 years.
That doesn't matter to Daniels. He wants a fresh start.
"There was no way I was ever going to be able to pay off $47,000," he said.
If his filing is successful, Daniels said he'd like to go to a low-cost college to get an MBA.
"I'm going to reinvent myself," he said. "And stay away from credit cards."