Bankruptcy filings surge in Georgia

Georgia’s already bustling bankruptcy courts got even more crowded this spring as job losses and the mortgage meltdown prompted a flood of consumers to seek protection from creditors.

Consumer bankruptcies statewide increased 23 percent in the second quarter of this year, compared with the same period last year, according to the National Bankruptcy Research Center.

Georgia has the third-highest rate of consumer filings in the country, behind Nevada and Tennessee. Nevada pushed its way to the top of the bankruptcy charts during the second quarter with a stunning 75 percent increase in filings over the same period last year.

Nevada is one of the hot spots in the national mortgage meltdown. California, Florida and Arizona — other hot spots for foreclosures — also posted dramatic increases in consumer bankruptcy filings during the period.

“It doesn’t surprise us that Nevada leads the nation in bankruptcy,” said Jack Williams, a Georgia State University law professor who is also resident scholar at the American Bankruptcy Institute.

Georgia’s 23 percent bump is significant, especially given its already high rate of filings. But the state did not experience as great an increase as other states, suggesting economic instability is less severe in Georgia than in some other states.

“We have a relatively stable regional economy,” Williams said. “But we shouldn’t delude ourselves. The rest of the year and the first quarter of 2009 are very dangerous financial times for Georgia. We can stabilize or we can turn to the worst very quickly.”

Bankruptcy trend lines have bounced around in recent years. Filings sky-rocketed in advance of 2005 reforms that made it tougher to file, then fell dramatically in 2006. They have been rising steadily since.

As the mortgage meltdown persists, most experts expect bankruptcy filings to continue to rise. The latest figures support those predictions. Chapter 13 filings in the Northern District of Georgia jumped from 1,261 in July to 1,964 in August, according to Yvonne Evans, the court’s clerk.

“I would expect to see the numbers continue to rise over the next couple of quarters until the residential real estate situation gets straightened out,” said Todd Zywicki, a bankruptcy expert at George Mason University’s law school. “I don’t think we have reached the finale of that.”

Georgia has been at or near the top of the bankruptcy charts for years. Most experts believe that the state’s high filing rate is linked to Georgia’s fast “nonjudicial” foreclosure process that requires no involvement by the courts. Once a homeowner falls behind and a lender initiates foreclosure, a house can be sold on the courthouse steps in as few as 37 days. No state allows a faster process.

Filing for bankruptcy protection automatically stops a foreclosure sale and is the only real option for many Georgia homeowners desperate for time to catch up on payments.

About 54 percent of Georgians who filed in the second quarter filed for Chapter 13 protection, which allows consumers to hold on to a house and car but requires that they repay a portion of their debts. A Chapter 7 filing, chosen by 46 percent of Georgians who file for bankruptcy, is a liquidation in which most debts are wiped out, but so are all assets that aren’t protected by exemptions. Nationally, 32 percent of consumers opted for Chapter 13, while 68 percent chose a Chapter 7.

The federal bankruptcy court based in Atlanta typically has more Chapter 13 filings than any bankruptcy court in the nation.

Lenders argue that the speedy, nonjudicial system works well in Georgia because it is efficient. That benefits lenders, they say, but also helps consumers because it lowers the overall costs of lending, allowing cheaper borrowing and more widely available credit.

Representatives of the banking industry say consumers also benefit under Georgia’s speedy system because lenders are less likely to pull the trigger when a Georgia homeowner misses one or two mortgage payments, since they know the process will move quickly once it begins.

“The last thing any bank or lender wants is a house — especially in this market,” said Joe Brannen, president of the Georgia Bankers Association.

But some experts argue that Georgia would be better off requiring a court process for foreclosures.

Bankruptcy court does offer a forum to contest a mortgage lender’s actions, and it also allows a consumer to set up a payment plan to catch up on debts. But when a consumer enters bankruptcy, all the consumer’s debts and assets are dragged into the process, and a host of lenders must come along for the ride.

“The only realistic judicial option [in the face of foreclosure] is bankruptcy, and that’s what is unfortunate about our system now,” said Frank Alexander, an Emory University law professor who is an expert on Georgia’s foreclosure law. “I think a judicial foreclosure process would be far superior to our current process.”

Bringing a foreclosure matter before a judge would ensure that all parties would get notice and it would offer an opportunity to mediate a resolution, without broadening the procedure to include a consumer’s other debts and assets.

Consumer Credit Counseling Service of Greater Atlanta, which provides court-mandated counseling for consumers seeking bankruptcy protection, set up a hotline to try to help consumers avoid bankruptcy if their financial problems are limited to the mortgage.

Doug Erickson, a vice president of CCCS of Greater Atlanta, said consumers and their bankruptcy attorneys were having difficulty negotiating with mortgage lenders when a foreclosure was pending.

“They would throw up their hands in disgust and file bankruptcy when the main problem is the mortgage,” Erickson said. “They are pushed into it because they can’t get a response from the mortgage company or don’t get the cooperation from the mortgage company.”

Erickson said CCCS has the contacts to help work out compromises with mortgage lenders, allowing some consumers to avoid bankruptcy. But consumers often make the situation difficult, he said, by waiting until a foreclosure sale has been scheduled.

About half of consumers who are at the point of foreclosure have never talked to their mortgage company about the payment problems, he said.

“If I have one message, it’s don’t be afraid to call your mortgage company,” Erickson said.