The first wave was in real estate and construction, followed by swells of contractors and then a sea of long-term jobless.
They've all found themselves facing bankruptcy. One man in the construction industry saw his gross revenues drop from $300,000 to $12,000. His 401(k) was gone and his house facing foreclosure.
Brainerd attorney Jim Fossum said he sees middle class working people who had good jobs now facing bankruptcy as their unemployment benefits run out. They may have second mortgages and now are upside down on their homes, owing more than the houses are worth as values drop.
"They are getting hit from all sides," Fossum said.
There are two primary paths for personal bankruptcy - Chapter 7 and Chapter 13.
Stretched for cash, some people have had to turn to credit cards to pay household bills, medical expenses or car repairs. And with job losses, those bills may have people teetering on financial disaster. While bankruptcy may be a last resort, it is a way to protect retirement accounts and find a fresh start.
Brainerd Dispatch/Renee Richardson
Changes to the bankruptcy laws in 2005 added the requirement for a credit counseling course before people file for bankruptcy with a fee of about $100. The law was expected to move more people toward a Chapter 13 filing where payments would be made on a person's debt for up to three to five years based on their disposable income.
The idea behind requiring the counseling course for filers was to see if a payment plan could take care of the debt. Fossum said every client goes through the course but he's never seen a payment plan proposed. The resources just aren't there for filers, Fossum said.
Fossum said he's worked with individuals who pay from $100 a month to about $2,000 on an approved plan in a Chapter 13 filing. With Chapter 13, an individual who has $100,000 in debt may pay $100 on the debt for three years, paying $3,600. The rest of the debt is discharged through the bankruptcy, meaning it does not have to be repaid.
If the person were eligible to file Chapter 7, the entire $100,000 debt may be discharged and there would be no monthly payments. The benefits of Chapter 7 is that it is a faster process. Both types may stop foreclosures.
A means test, based on income, decides whether a person may file for Chapter 7 or Chapter 13.
Not every debt is forgiven. People still have to pay for secured debts such as home and car loans or give the property back. Unsecured debt, such as medical bills or credit cards, may be wiped out in the bankruptcy. Secured debt, tied to property, survives a bankruptcy. Extras such as toys - recreational vehicles and home electronics - may be paid off with a payment plan or returned to a court-appointed trustee. Through Chapter 13, if 100 percent of the debt is paid through the payment plan, a person may keep their non-exempt assets.
For those facing a foreclosure, Chapter 13 is an option to cure a mortgage default. If a homeowner is $10,000 behind in payments, the debt may be divided into extra payments to be made for a period up to 60 months. While the extra payments may be a burden for people who are already struggling, it does provide an option to get caught up and keep a home.
Fossum said some people, who find themselves without a job, have tried to get by using credit cards and have racked up thousands of dollars of debt. Credit cards covered living or medical expenses or, perhaps, a vehicle repair. If a person owes $50,000 in credit cards and is in default, Fossum said paying 30 percent interest leaves little opportunity to crawl out of the financial hole. By filing for Chapter 13, the interest on the debt essentially stops. Fossum said that allows people to see a light at the end of the tunnel.
"Almost everybody I talk to just feels terrible about this," Fossum said of people who come in for a consultation for bankruptcy. People who lived it up and are now trying to get out of paying their bills are few and far between, especially these days, Fossum said.
Most people have already used up all they had to try to pay their bills. If they had considered bankruptcy earlier, they could have saved their retirement funds. Fossum sees 40- and 50-year-olds who may never have been without work for any extended period in their entire lives and are now without retirement funds and forced to start over. The 401(k), Roth, IRA and Education IRA accounts are protected in a bankruptcy filing, up to a certain limit, as one of the good, new exemptions in since 2005, Fossum said.
In Minnesota, Fossum said people are allowed to keep $330,000 in equity in their homestead, about $4,000 in a motor vehicle, along with clothes and basic household goods as exemptions.
"They don't leave you with luxury items but they don't leave you out in the cold either," Fossum said. "You still have to pay the bank the mortgage you have."
Luxury items they must pay for, sell or give back to a trustee. But they may be able to negotiate a deal to keep some items such as hunting equipment, an older boat or an older four-wheeler.
Fossum said people come in with considerable concern about their credit rating and what a bankruptcy will do to it. But he feels that concern is overblown. He noted people in such severe financial trouble have already damaged credit ratings.
"Going forward if you've cleaned this whole mess up you may become, I always say 'may' become more credit worthy, strange as that may sound, by cleaning all of this up through a bankruptcy," Fossum said.
After a bankruptcy, Fossum said credit ratings may be rebuilt through use of a debit card and by paying off credit card charges completely each month. Until a healthy credit is rebuilt, people may be paying a higher interest rate on loans they qualify for.
"Personal bankruptcy generally is considered the debt management option of last resort because the results are long-lasting and far reaching," the Federal Trade Commission reports. "People who follow the bankruptcy rules receive a discharge - a court order that says they don't have to repay certain debts.
"However, bankruptcy information (both the date of your filing and the later date of discharge) stay on your credit report for 10 years, and can make it difficult to obtain credit, buy a home, get life insurance, or sometimes get a job."
Even with all those cautionary notes, the FTC notes bankruptcy is a legal option for a fresh start for people who can't pay their debts.
In the Brainerd area, Fossum said he started to see more people coming through his law office door in 2006 and 2007 - all tied to the housing meltdown. Fossum said he expected it to level off this year, but it seems to have picked up a bit as 2009 draws toward a close.
RENEE RICHARDSON may be reached at email@example.com or 855-5852.
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