Bankruptcy filings continued to decline locally and nationally last year.
But while most see that trend as continuing or leveling off in coming months, some bankruptcy professionals see credit problems on the horizon. Their concern: student loan debt, a growing problem that bankruptcy cannot solve.
Rochester-area bankruptcy filings declined 14.6 percent in 2012, falling to 2,116 from 2,477 in the previous year. National filings declined 14 percent from 1.37 million in 2011 to 1.18 million last year.
The local statistics cover the Rochester Division of the federal courts' Western District of New York, which includes Monroe, Livingston, Ontario and Wayne counties as well as Chemung, Schuyler, Seneca, Steuben and Yates.
Here and across the country, bankruptcy filings spiked in 2005 as debtors rushed to file before more stringent bankruptcy rules took effect in October of that year.
Local filings in 2005 hit a record high of 7,840; national filings that year climbed to 2 million. In 2006, Rochester-area filings fell to 2,700; nationally, they dropped to 617,000.
But after filings continued to rise here and around the country through 2009, the local and national trends diverged. National filings rose again in 2010, climbing to 1.6 million from 1.5 million a year earlier. Rochester-area filings dropped to 3,123 in 2010 from the previous year's post-2005 peak of 3,490, while U.S. filings did not start their present decline until 2011, when they dropped by roughly 100,000 petitions.
Like many local observers, bankruptcy lawyer Bruce Lawrence of Boylan Code LLP believes the key to the divergence is that Rochester-area housing prices never rose to the unprecedented heights of California, Florida, Nevada and many other U.S. markets-and consequently never had plunges in value like those markets.
Because the region mostly escaped the housing bubble, its economy stayed on a relatively even keel, avoiding the lows other areas fell to, Lawrence said.
Concurring is bankruptcy lawyer Douglas Lustig of Chamberlain, D'Amanda, Oppenheimer & Greenfield LLP.
"Bankruptcies are way down here because we haven't had the issues other areas have," Lustig said.
Like Lawrence, who predicts at most a modest rise in filings this year, Lustig does not see bankruptcies here likely to climb substantially. Still, he added, a continued low rate of bankruptcy filings might not be the good economic news one might think.
"I'm seeing a lot of cases I can't file for debtors because the debt is mostly in student loans," Lustig said. "I have to tell them there's nothing I can do for them."
Credit card debt or mortgage and car loans can be eliminated or greatly reduced in bankruptcy. Student loan debt is non-dischargeable. That means when a bankruptcy is done, a debtor's student loan balance still has to be paid in full.
While some student loans are written by private lenders, all are guaranteed by the federal government, a feature that could have taxpayers on the hook for a growing student loan problem.
In a third-quarter 2012 report on household debt and credit, the New York Federal Reserve found that while the overall level of consumer debt was starting to fall nationally with drops in mortgage and credit card debt, student loan debt was growing. And much of the student loan debt is not being repaid, the report found.
Student loan obligations grew by $42 billion in the quarter, bringing total student loan debt to $956 billion nationally, the New York Fed reported. Of the $42 billion increase, $23 billion was new debt, while the remaining $19 billion traced to previously defaulted student loans that had been updated on credit reports in the quarter.
"Delinquency rates for student loans are likely to understate actual delinquency rates," states a footnote in the Fed report. "Almost half of these loans are currently in deferment, grace periods or in forbearance and therefore temporarily not in the repayment cycle. This implies that among loans in the repayment cycle, delinquency rates are roughly twice as high."
An October report by the Institute for College Access & Success, a non-profit with offices in Oakland, Calif., and Washington, D.C., found that two-thirds of U.S. college graduates left school owing on tuition loans from private and government lenders. The average student loan debt for 2011 graduates was $26,600, up from $25,250 a year earlier. Loans financing postgraduate law and medical studies can reach six figures.
As senior counsel of Tully Rinckey PLLC's bankruptcy practice, Robert Rock has been watching this area's bankruptcy trends with an eye toward expanding the Albany-based firm's bankruptcy practice here.
Debtors in the Capital Region similarly are having problems repaying student loans, he said. Parents and grandparents are also at risk.
"They co-sign Sonny's student loan, thinking he'll get a job when he graduates, but the jobs aren't there," Rock said.
At some point, new federal legislation will be needed to address the problem, Rock believes.
Unemployment rates have been improving, Lustig conceded. But many graduates strapped by student loans who seek his counsel have landed only low-paying jobs.
"The job market, while getting better, may permit a person to land a job, but it is not sufficient to pay the student loans," Lustig wrote in a May 2012 letter urging elected officials to take action on student loans.
Bankruptcy petitioners should be allowed to include student loan debt in Chapter 13 payment plans, he proposed.
Chapter 13 filers are usually individual consumer debtors and sometimes are small-business people operating under a doing-business-as registration. Unlike Chapter 7 filers, who seek to liquidate assets to pay creditors, Chapter 13 debtors agree to pay debts fully or partly in monthly installments over a maximum five-year term.
In Lustig's plan, new features would apply to student-loan debts:
Interest payments on the student loan portion of Chapter 13 debts would be suspended while filers' cases were in progress;
A provision already applied to other Chapter 13 debts would bar lenders from taking action against student-loan co-signers while cases are in progress;
Debtors would be allowed 30 years to pay off the student loan part of their debt; and
Amounts remaining at the end of the 30-year term would be forgiven.
"I write this non-partisan letter as a general and consumer bankruptcy practitioner for over 35 years (and a) Chapter 7 bankruptcy trustee for over 30 years," his letter states. "There are many instances which I have seen and am currently handling where the student debt is so large that there are no satisfactory payment plans available. ... I will be glad to make myself available to provide further refinements."
A registered Republican, Lustig sent a copy of his plan to President Barack Obama, both U.S. senators from New York and all members of the area's congressional delegation. So far, he said, no one has replied.
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