According to a reported released today by the American Bankruptcy Institute, the number of American consumers who filed for bankruptcy increased by nearly 40 percent in 2007 thanks to ongoing mortgage crisis.
The ABI said the number of consumer bankruptcy filings climbed to 801,840 last year, compared to 573,203 in 2006, based on data collected by the National Bankruptcy Research Center.
“The roughly 40 percent spike in consumer bankruptcies during 2007 presages [an] even higher [number of] filings this year, as the heavy consumer debt load is made worse by the home mortgage crisis,” said ABI Executive Director Samuel J. Gerdano, in a statement.
In 2006, bankruptcy filings hit their lowest point since 1998 after averaging around 1.5 million filings annually for nearly a decade.
Personal bankruptcy filings soared to more than 2 million in 2005, but subsequently fell after sweeping changes were made to the bankruptcy laws in October 2005.
The so-called “Bankruptcy Abuse Prevention and Consumer Protection Act of 2005″ was enacted to make it more difficult for consumers to qualify for bankruptcy protection under Chapter 7, where most debts are forgiven.
The new law forced many borrowers into Chapter 13, where a debt repayment plan is ordered.
However, a new bill referred to as the “Emergency Homeownership and Mortgage Equity Protection Act of 2007” would allow homeowners to reduce the mortgage balance on their primary residence during bankruptcy proceedings, potentially leading to a flood of new bankruptcy filings.
Democrats believe the measure could help 500,000 homeowners avoid foreclosure, while Republicans and mortgage industry leaders believe it will cause mortgage rates to spike and further restrict lending.