By Greg Wiles
At Consumer Credit Counseling Service of Hawaii business is booming, especially when it comes to providing the mandatory financial counseling that's required before someone can file for bankruptcy.
That's been increasing and figures to rise even more this year, says Wendy Burkholder, head of the agency that provides advice and counseling on how to handle debt problems.
"I think we're going to see a tremendous increase in volume this year," said Burkholder, ticking off a list of factors that could contribute to a rise in bankruptcies. Rising adjustable-rate mortgage payments. Record gasoline prices. Higher food prices. Aloha Airlines' collapse. The closing of Molokai Ranch.
"It's going to be a really busy year."
Bankruptcy filings are increasing in Hawai'i, as witnessed by an about 26 percent jump during the first three months of the year. The surge in people going broke is in line with the trend nationally, where experts are saying heavy household debt burden and growing mortgage problems are forcing people into bankruptcy court.
The increase is being driven by a number of factors, one of which involves some history. A year and a half ago the U.S. bankruptcy code was tightened up, making it more difficult for people to clear their debts through the process. Congress changed the law after credit card companies and other lenders complained too many consumers were using bankruptcy to shed debt even if they could make partial payments.
Many people filed before the law change in October 2005. But since that time the numbers have been creeping up. March had the most filings in 18 months, said Mike Bickford, president of AACER, an Oklahoma City firm that tracks bankruptcy filings nationwide.
"It's just a steady uptick," said Bickford. "We're going to be in a period over the next one to three years where we're going to see increased filings."
But Bickford, like others, says the current spike in filings is more than just filings inching back up to a normalized rate. Hawai'i's overall per-capita filing rate remains low compared to the rest of the country, but it is on the rise.
A lot of the increase has to do with the overhang from days when mortgage standards weren't as high, with so-called sub-prime credit customers jumping on non-traditional loans that included interest-only and zero-money-down products. Many hoped increases in their own earnings or higher home prices would bail them out as the loan payments adjusted higher.
"These people have been thirsting for home ownership," said Khaled Mujtabaa, an attorney specializing in bankruptcies and foreclosures.
"They had their hopes built up and some of them realistically thought they could do it."
But now with real estate prices declining and loans adjusting with higher interest rates, some sub-prime mortgage holders are under water.
Some can't sell in the slowing real estate market and cover their loan amount, while others who try to look into refinancing at a lower interest rate sometimes find credit standards have risen and that lenders aren't interested in their business.
Dawn Smith, a former bankruptcy attorney who is now a mortgage solicitor, said lenders are now looking for borrowers who have excellent credit scores (800 on a 950-point scale) and can put 20 percent down. They're also demanding appraisers be more rigorous in valuing homes.
With refinancing out and no prospects for selling their homes at the desired price, people are looking to bankruptcy attorneys to avoid foreclosure. Many are also dealing with creditors' frequent calls demanding payment.
"They're filing bankruptcy to get rid of the mortgage and give up the house as part of the bankruptcy," said Stuart Ing, a bankruptcy attorney.
"They were just making it before and there's no way they're going to make it with a significant adjustment."
Bankruptcy is a way to avoid a judicial foreclosure, which could still leave the homeowner owing money to pay the bank if the residence doesn't sell for as much as the loan amount.
Chapter 7 stops foreclosure proceedings. But because Chapter 7 liquidates assets, many who go this route lose their homes.
Recently, more are turning to Chapter 13, which staves off foreclosure proceedings while the homeowner works out a plan to pay off debts other than mortgages usually over three to five years.
During the first quarter Chapter 13 bankruptcies shot up 60 percent, while Chapter 7s rose 19 percent.
Burkholder said many people also are suffering from crushing credit card debt and simply can't keep up with payments anymore as statewide gasoline prices edge toward $4 a gallon and grocery prices rise at the fastest clip in 17 years.
"Probably if you did some digging a lot of the increase in bankruptcies are people filing in an effort to stave off foreclosure," she said.
"Then the balance of it is people just finally succumbing to being on the edge."
That includes people who have had some sort of financial crisis, such as a costly illness, and others who worked multiple jobs but have lost one or had hours cut because of the slowing economy.
For now the latter doesn't include the 2,050 people who were let go as Aloha Airlines grounded its passenger operations. Ing reported getting a call from a couple of former Aloha employees, but they were mostly inquiring about the process and costs. Bankruptcy experts say many people tend to hang on after losing jobs, either relying on spouses or family to carry them through until they find new jobs.
Bankruptcy statistics show the majority of people who file have jobs. An Institute for Financial Literacy study last year found about 64 percent of petitioners in 2006 were working, while unemployed people were the second largest category at 13.1 percent.
The primary reasons for their financial distress was too much debt, unexpected expenses, reduction in income or job loss or illness, the study said.
Mujtabaa said he expected to receive calls from laid-off Aloha workers, as well as other people losing their jobs locally.
"Hawai'i will be less affected than the Mainland, but I think there's going to be a substantial increase in the number of bankruptcies here," Mujtabaa said.
Hawai'i residents typically are a little more financially conservative than their Mainland counterparts with less foreclosures and bankruptcies than most other states. bankruptcies per-capita here were the second-lowest nationally, trailing only Alaska, during the first quarter.
Still, most people expect that rate to increase this year. Ing said filings probably won't slow down for at least another two years since some adjustable rate mortgages have yet to reset at higher levels.
"Everyone thinks the market is going to turn around," Ing said, noting bankruptcy attorneys are typically last in a string of solutions people seek.
"Everyone is an optimist until they have to come see us."
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