Americans Financially Unable to Meet Current Debt Payments. 85 Percent of Chapter 7 Filings are Classified as No-Assets.

The U.S. Courts released data last week closing out the 2009 fiscal year. In the release we find that bankruptcy filings are up 100+ percent from 2007. No other economic vehicle shows deeper signs of financial strain than bankruptcy. Bankruptcy is the end of the road for many Americans. Although businesses file for bankruptcy as well the vast majority of filings come from individuals simply not able to meet the demands of their monthly payments. Average Americans are looking at the recovery talks but the reality on the street is much different.

Bankruptcy isn’t a new concept. In fact it has its roots in English law dating back to 1542 under the reign of Henry the VIII. The first laws of bankruptcy were designed to protect the creditor, not the debtor. The creditor had the right to seize all the possessions of the debtor and the debtor also lost his freedom by imprisonment if he failed to pay his debt. Families were left struggling to pay for this debt over multi-generations. Many in the 1700s that were released from debtors’ prison left England and immigrated to places like Georgia and Texas in what came to be known as debtors’ colonies. We have come a long way from that point in history.

Bankruptcy happens for a variety of reasons including loss of job, divorce, medical, and simply being unable to meet the new terms of onerous debt. Many credit card companies jacking rates up to 79.99 percent or suddenly setting up traps for consumers only help to accelerate the growing trend in bankruptcies.

In 2005, the bankruptcy code was redesigned by the banking oligarchs to stick it to the average American yet again. That is why if we look at quarterly filings, we see an enormous spike in 2005 before the modern debtors’ prison made its way back:

The spike above is enormous because this happened in a supposedly booming economic time. Since bankruptcy always involves debt, this bubble decade induced by debt was a perfect breeding ground for bankruptcy. Many unable to pay their debts saw the writing on the wall and filed before the new law took effect in 2006. Even with the new stringent measures bankruptcy filings have been soaring and are now up 104 percent from 2007. This is happening because 27 million Americans are unemployed or underemployed and it is hard to squeeze any payment out of someone with no income.

65 percent of all U.S. consumer filed bankruptcies are Chapter 7 cases. In a Chapter 7, the individual surrenders their non-exempt property to a trustee that then liquidates the unsecured property. Usually a home is protected in a Chapter 7 bankruptcy. That is, unless a home is underwater and is the financial reason for bankruptcy. In that case, many homeowners will simply allow the home to go into foreclosure and with 300,000 foreclosure filings a month this is what is happening. After the unsecured property is liquidated, the debtor usually has much of the debt discharged.

But what happened in 2005 was a “means test” was added to the bankruptcy process. Someone that failed to meet the means test would have their case dismissed and possibly have their case converted into a Chapter 13. With Chapter 13, the debtor still holds onto the property but needs to allocate a portion of their income to debt repayment. If you want to look at the HAMP program that is trying to rework hundreds of thousands of mortgages, this is a mini Chapter 13. On the surface it sounds good. But in reality, this is only a method of siphoning off more money from struggling debtors by the banking oligarchy. The average American in many of these cases is simply unable to pay their debts. A large reason for our economic problems stems from too much debt given to too many people. On a yearly basis bankruptcy filings are still rolling up:

Now if things were recovering why would bankruptcies still be going up? The fact of the matter is that many Americans are seeing nothing of the recovery. The fact that many of the cases are Chapter 7 means that even with the more stringent means tests, many simply do not have the means to pay their debts. A program like HAMP, in states where housing has fallen by 30, 40, or even 50 percent is a Chapter 13 for a home. On the surface it looks like a helping hand to a homeowner in distress. But in reality, it is a way for banks to protect their bottom line without confronting the massive onslaught of foreclosures that would result. The borrower in many cases is still struggling but the banks at least have a little bit of cash flow from the place and can claim the home is still worth the inflated asset value they secured a note with.

Things are so tough, that you have people asking if they don’t have to pay bills to companies that have filed bankruptcy:

“(Cleveland) The fact that the retailer went broke does not mean that its credit customers get to keep the merchandise they have not yet fully paid for,” says Cleveland bankruptcy attorney Richard Nemeth.

He says that, if you haven’t already, you can expect to hear from the court-appointed trustee, who will request you pay the loan as agreed.

You should, however, be able to reduce the loan balance by the cost of the soon-to-be-worthless extended service plan.

These kinds of extended service plans usually involve simple maintenance like cleanings and prong-tightenings, and they may cover lost stones.”

I know some think that people that file for bankruptcy at times are trying to game the system. This is just another myth perpetuated by the corporate welfare banking system. In fact, according to the ABA over 85 percent of Chapter 7 filings are “no-asset filings” meaning there are no assets for creditors to go after to recover the debt. Average Americans are still struggling with the real problems of the real economy.

So it should come as no surprise that bankruptcy filings are still trending up. Without employers hiring and unemployment still high, we can expect more and more Americans to reach the end of their rope. But also, with $3 trillion in commercial real estate coming due in the next five years starting in 2010 we will expect many businesses to also file for bankruptcy protection. The real economy is telling us something very different from the stock ticker.