Foreclosures keep ’em busy: Bankruptcy attorneys, credit counselors seeing surge in clients

Many consumer bankruptcies typically can be traced to a divorce, job loss or medical issue. Now another perpetrator-subprime mortgages-is entering the fray.

The fallout from the housing crisis, coupled with a weakening economy, is contributing to a rise in bankruptcy filings nationwide. They spiked more than 30 percent in January compared with the same time last year, according to the Virginia-based American Bankruptcy Institute.

With more than 1 million subprime mortgages due to reset this year, ABI Executive Director Samuel Gerdano warned that higher payments could lead to even more bankruptcies this year.

In Indiana, filings in 2007 totaled 30,757, a 27-percent jump from the year before. Numbers dipped in 2006 after tougher bankruptcy laws instituted the previous October caused a rush to beat the deadline.

But bankruptcy lawyers again are experiencing a surge that could ultimately rival what occurred in 2005. The six-person firm of Hostetler & Kowalik PC, for instance, has added three attorneys and is searching for a few more.

“With credit as easy to get as it was, we’re just now seeing the results of that,” partner Gary Hostetler said. “I don’t see it ending anytime soon. We’re not at the top of the curve yet, that’s for sure.”

His forecast is in stark contrast to what occurred after sweeping bankruptcy reform brought filings to a nearstandstill a few years ago. Changes were meant to curb abuses of the system by sending more filers away from Chapter 7 and into Chapter 13, which requires consumers to repay at least some debt.

The stricter regulations tightened income guidelines, raised filing fees, and made the process more complicated. It did so by requiring debtors to seek credit counseling from not-for-profits before they can file for court protection from creditors, as well as forcing them to complete a two-hour money-management course upon exiting bankruptcy.

Due to the mandate, counseling and education providers also are encountering an influx in activity.

More seeking assistance

Momentive Consumer Credit Counseling Service, a locally based not-for-profit that has counseled clients since 1965, provides both credit-counseling and debtoreducation services. Its clientele has doubled in the past two years, Momentive President Bill Sultan said.

Much of the counseling is conducted through an online program and takes about two hours, said Sultan, who wonders whether the extra requirement really is making a difference.

“The problem is, people don’t go into it with an open mind to alternatives to bankruptcy,” he said. “What they’re doing is just getting their ticket punched. They’re pretty close-minded.”

To deal with demand, Momentive reassigned some counselors who typically advise clients burdened by debt but whose situation is not severe enough to prompt bankruptcy. Those who seek its services voluntarily rather than obligatorily still make up 90 percent of its business, Sultan said.

Another provider is Cincinnati-based Advantage Debt Management of America, which serves consumers in Ohio, Indiana and Kentucky.

Advantage’s annual client volume quadrupled to more than 12,000 after the bankruptcy law changes, prompting it to charge just those seeking bankruptcy $35. Both Momentive and Advantage said their fees don’t even cover the costs of providing the added service.

Grants have helped offset costs to hire more counselors and customer-service representatives, Advantage Education Director Jim Lucas said.

“People really needed counseling before they went into these subprime loans,” he said. “Now it is available, but unfortunately, in many cases, it’s much too late.”

As a Chapter 13 trustee for the federal bankruptcy court in Indianapolis, lawyer Ann DeLaney provides debtor education for consumers exiting bankruptcy. Higher mortgage payments triggered by adjustable rates, as well as higher property taxes make for a busy schedule.

“We’re seeing more people surrender their homes,” she said. “If you get people with a subprime [loan] who are close to the edge, anyway, and their mortgage payment jumps, that’s a huge, huge difference.”

In 2007, 2.2 million foreclosure filings-default notices, auction sale notices and bank repossessions-were reported nationwide, up 75 percent from 2006, according to California-based research firm RealtyTrac Inc.

In Indiana, one in 10 properties is in some stage of foreclosure, a rate that is 10th highest in the nation, according to RealtyTrac. All told, 52,930 foreclosure filings were reported in the state last year, an 11-percent increase from 2006.

Some of those Hoosier homeowners are visiting local bankruptcy lawyer Mark Zuckerberg, who has offices in Indianapolis, Anderson, Columbus and Bloomington. His workload is beginning to resemble what it did before bankruptcy laws changed.

“They know they’re losing their homes and they know they’re going to be sold,” Zuckerberg said, “so they’re coming in and filing now to get rid of the debt.”

Others may be waiting until after they receive their so-called economic stimulus checks from the federal government in May, he assumed, for fear the money may be garnished to repay debt.

The number of Indiana foreclosures even reached levels last year that caught the attention of legislators. They established the Indiana Foreclosure Prevention Network featuring the 877-GET-HOPE hot line that connects Hoosiers with counselors. They are available seven days a week from 8 a.m. to 8 p.m.

A Web site, www.877gethelp.org, provides details to the program administered by Momentive Consumer Credit Counseling Service. Since its inception four months ago, Momentive has fielded 7,000 phone calls and tracked 10,000 hits on the Web site.