by Attorney Kara O’Donnell of Quincy, MA.

Massachusetts is like many states in the country in that it is suffering from an unusually high unemployment rate and a real estate market which, while no longer crashing, shows little immediate promise.  Combine those two ingredients, allow to simmer and what do you get?  An unsavory dish of record bankruptcy filings in our state.

The most recent available statistics released by the United States Bankruptcy Court indicate that the number of new people filing for  bankruptcy in MA has risen 35% in the second financial quarter of the year versus the same time last year.   Looking back over the past two years shows that the number of filings has actually doubled.

While multiple factors may exist as to why this has occurred, a reasonable guess would be that the recession has caused more consumers to accumulate more credit card debt and spend through savings as they deal with growing unemployment.

The same statistical reports indicate that people who are filing bankruptcy are far less likely to choose Chapter 13, the repayment plan option, than its “full discharge” cousin Chapter 7.    In the second quarter, according to the report, Chapter 7 bankruptcies rose 58 percent while Chapter 13 bankruptcies actually dropped.  Why?  With fewer jobs and less income, consumers are simply less able to fund an acceptable payment plan and have no other choice but to file Chapter 7.

Q:  Why would someone even choose Chapter 13 if they could just file Chapter 7?

While an individual’s reasoning varies in each situation, in general, most people file Chapter 13 to be able to retain a major asset (e.g. house) and force the mortgagor into allowing a repayment of the arrears over an extended period of time.  Assuming the debtor has enough funds to pay the existing monthly mortgage payment, he would be able to get back into good standing with the mortgage company by paying both the regular payment and the small arrearage payment set up through the Chapter 13 plan.  People may also file Chapter 13 if their household income is higher than the Means Test or if they have filed Chapter 7 in the recent past and are prohibited from doing so again.

Q:  Will Bankruptcies Continue to Rise?

All signs point to continuing increases in the bankruptcy filings in Massachusetts throughout the next two quarters, at a minimum.  As the recession drags on, people will begin to experience the inevitable: unemployment benefits running out.  Absent another Federal extension, the sudden loss of benefits could force many into bankruptcy as a direct result.   Economists are in agreement that many, if not most, bankruptcies occur later in a poor economic cycle.  Which brings us to one final question:

Q:  Are We There Yet?

Kara O’Donnell, Esq.

Law Office of Kara O’Donnell