By OWEN MCCARTHY
Capital News Service
LANSING – Lynn Osborne, a Lansing-based bankruptcy attorney, recently represented a single mother of three who makes about $50,000 a year and will now have to pay creditors about $10,000 of her home equity.
And that will be difficult as “she’s already at a negative income,” Osborne said.
“Money is not adding up. She’s going to have to stretch — there’s nothing to stretch, so she’s in a really bad situation.”
Osborne’s client’s income would typically make her eligible for a Chapter 7 bankruptcy where she wouldn’t have to make any payments but her assets would be liquidated to repay creditors.
But Osborne said the overinflated value of her client’s home makes the mother ineligible for that type of bankruptcy protection.
Michigan bankruptcy filings in the first three months of 2024 are up 6% from the first three months of 2023, according to federal bankruptcy court data.
The surge follows a trend of increased bankruptcy filings across the country that began in 2023 and continues this year. Filings dropped each consecutive year from 2019 to 2022.
In 2023, Michigan filings rose 12% to 18,282 from 16,354 the year before, according to court data. The country at large saw a 17% increase to 452,990 from 387,221 the year before.
Bankruptcy protection allows individuals and businesses to receive a financial bailout for most outstanding debts.
Even people with higher incomes are resorting to bankruptcy.
Osborne said she recently represented a married couple in a two-person household who make six figures a year.
“When we think about people with a six-figure income, obviously we think they should be able to make it in today’s world – like that’s definitely a living wage,” she said. But with inflation, a high income “doesn’t mean as much as it used to.”
One explanation for rising filings this year is the drying up of federal pandemic-era stimulus money, first distributed to boost economic activity in 2020, Wayne State University law professor Laura Bartell said.
“Obviously, there’s the end of the COVID financial support as everybody got the benefit of federal largesse during COVID,” Bartell said.
Interest rate hikes by the Federal Reserve, or Fed, to combat inflation are also making it tougher for consumers and businesses to pay creditors, she said.
“To the extent that the interest rates on those debts go up when the Fed raises the interest rates, obviously that’s going to make it more likely that (consumers) are going to be unable to service their debt, and they’re going to have to file for bankruptcy,” she said.
“But the Fed has other things on their mind than the consumer bankruptcy filer,” she said.
The average credit card interest rate hit 21% — an all-time high — last December, according to a CNBC report.
Federal courts will either liquidate debtors’ assets to repay creditors or create a debt repayment plan specifying exactly how debtors will repay their debt over time, somewhere between three and five years.
Filing for bankruptcy doesn’t let consumers and businesses off scot-free, however.
Credit scores and the capacity to borrow cash are adversely affected for years after a bankruptcy. That can hinder consumers’ ability to qualify for credit to make large purchases, like houses and cars.
For businesses, bankruptcy also brings — aside from bad press — weakened credit ratings, preventing them from negotiating favorable terms with suppliers and procuring loans.
Bartell said increases in business bankruptcies might be caused, in part, by small businesses’ fear of a potential restructuring of federal bankruptcy rules.
In 2019, Congress created a new category of bankruptcy filing, called “subchapter five” within the existing Chapter 11. Bartell said that change was intended to “streamline” the bankruptcy process for small businesses.
Congress acted because the existing law “has historically not worked real well for small businesses,” she said. “Too lengthy, too costly.”
During the pandemic, Congress voted to temporarily raise the eligibility threshold for small businesses to qualify for the new category from $2.7 million in debt to $7.5 million, allowing more struggling businesses to qualify for a quicker bankruptcy process.
But that higher eligibility threshold is set to sunset back to the original $2.7 million figure in June of this year.
“I think there may be a lot more filings in the first and second quarter of this year, as people are worried that maybe Congress won’t act to extend the $7.5 million eligibility figure,” Bartell said.
“That’s kind of a hot issue for small businesses, whether that figure is going to be extended, and if not, they want to get in before it sunsets.”
Kathryn Ellywicz, a certified credit counselor at GreenPath Financial Wellness — headquartered in Farmington Hills — said she has recently seen an uptick in people seeking debt repayment counseling.
“What we find is that sometimes people think that bankruptcy is their only option, and they think ‘I have so much debt, there’s nothing else that I could possibly do.’ That’s not true in most cases,” she said.
Other options include creating a debt repayment plan, entering into a debt settlement and taking out a debt consolidation loan, Ellywicz said.
Credit counselors try to show clients options other than bankruptcy, which can hinder employment opportunities, in addition to damaging future credit prospects, she said.
Bankruptcy “is on your permanent record,” Ellywicz said.
Ellywicz said GreenPath Financial Wellness is increasingly speaking with clients for whom paying down debts on their own isn’t an option due to high interest rates on credit cards.
“Those monthly payments have ballooned,” she said. “They’ve really gotten out of control for people.”