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Experts puzzled over surge in local bankruptcies

Is Toledo becoming the bankruptcy capital of the Midwest?

Experts don't think so, but they are hard pressed to explain the surge in bankruptcy filings - more than 800 in both March and April - in U.S. Bankruptcy Court in Toledo. Until then, the highest monthly figure since at least 1995 was 580.

Among the factors cited for the upsurge:

  • Bankruptcy reform, which could make more filers pay back at least some of their debts. The reform legislation was stalled in Congress last year by President Clinton, who didn't support it, but it sailed through the House and Senate in March and President Bush is expected to sign it once minor differences are worked out between competing bills.

  • Layoffs and reductions in overtime worsened in the area early this year. In the first week of January, for example, more than 2,500 employees at area auto plants had weeklong layoffs, and union leaders reported overtime had been cut significantly. Each instance crimped personal income and savings.

  • Bills from exuberant holiday spending, even if on par with a year earlier, meant tougher times paying in January and February.

  • Consumer confidence nationally worsened significantly, according to the Conference Board. It fell sharply in December and January and hit a four-year low in February, which could have dimmed hopes of people with significant financial problems.

    The coming together of such factors in the first quarter of the year seems to be the best explanation for the dramatic increase in residents of the 21 northwest Ohio counties covered by the Toledo court seeking to liquidate their debts.

    Still, although experts said they expected an increase in cases, the 2,700 filed in the first four months were 1,000 more than a year earlier and stressed local court workers and bankruptcy attorneys.

    ``Surge. Astounding. Shocked. Those are all good words to use to describe this,'' said bankruptcy attorney Deborah Spychalski, head of the Toledo Bar Association's bankruptcy committee.

    What has surprised her most of late, she added, are debtors able to meet their payment obligations who choose bankruptcy rather than struggle financially for years.

    ``There's a new breed of person in bankruptcy,'' Ms. Spychalski said. ``The new bankruptcy Chapter 7 debtors are the ones that haven't been behind in their payments. But they realize the sea of debt they're in and instead of missing payments, they're just filing and then they stop paying.”

    The result has blindsided and angered some creditors, she added.

    The impending change in bankruptcy laws, which will increase the difficulty for some of declaring personal bankruptcy under Chapter 7, seems to be the prime factor motivating many filers of Chapter 7, Ms. Spychalski and others said.

    Under the bills in a joint House-Senate committee that is expected to produce a version acceptable to both, those judged able to pay some of what they owe could be disqualified from using Chapter 7. That chapter now allows most unsecured debts, like credit-card bills, to be wiped out. Instead, under the reforms, those filers would be forced to use Chapter 13, which sets up a schedule to repay debts over time.

    This huge change, which was backed mainly by credit-card companies, has prompted many into filing now, and with the quick congressional action early this year, it might have helped spike the northwest Ohio filings, experts said.

    Each time the news media report about the pending reforms, bankruptcy lawyers get plenty of calls from anxious debtors and more people stream in to file cases, Ms. Spychalski said

    ``It's settled in with the public that it's an option that they should be looking at now. It's like constant advertising for bankruptcy,'' she said.

    Donald Robiner, head of the U.S. Bankruptcy Trustees office for Ohio and Michigan, said bankruptcies in the two states have jumped. But he conceded that Toledo has had an unusually large bump in filings.

    ``You can't point to Toledo as being a community that there's anything unusual or catastrophic going on,'' he said, unable to explain the high bankruptcy figures. Although unemployment is higher locally than in recent years and the economy has weakened, those factors alone don't account for the strong numbers of people wanting to liquidate their debts, he said.

    A confluence of factors, such as overtime being cut but personal spending remaining the same, resulting in a shortfall, is to blame, said Toledo bankruptcy attorney Gordon Barry.

    He said many people are holding their breath for what occurs at the end of June, when Toledo Jeep has up to 2,000 permanent layoffs and other area autoworkers are temporarily idled for model changeover work. ``There's going to be a lot of people filing then, we think.''

    Another factor, he said, was a change last year in the way Ohio permits wages to be garnisheed. Garnishment for child support or other reasons was permitted once a month, affecting just one paycheck, but beginning in August it was permitted for each paycheck.

    That could make it tougher to handle other bills and result in more people giving up and filing bankruptcy, he added.

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