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Bankruptcy filings in Utah jumped 6 percent last year, with all the increase occurring in October as consumers flooded into court to declare themselves insolvent before a tough new federal bankruptcy law took effect.
The state started the year on a positive note with 1 percent fewer Utahns filing for bankruptcy during the first nine months of 2005 than in the same period of the previous year.
Yet with the Oct. 17 enactment of the federal Bankruptcy Abuse Prevention and Consumer Protection Act looming, a staggering 5,680 Utahns rushed into court to reverse that trend and help set a state record of 21,784 bankruptcies in a single year.
Utah wasn't alone. Other states experienced the same onslaught, said Sam Gerdano, executive director of the American Bankruptcy Institute in Virginia.
Following the October rush, only 340 Utahns sought bankruptcy protection in November and December.
William Stillgebauer, clerk for U.S. Bankruptcy Court for Utah, suggests that filings may pick up toward the end of the first quarter of this year. "The first few months of every year usually are a fairly slow time but toward the end of March and in early April some people begin to realize they overspent for Christmas and may come up short of money for their taxes."
The new federal bankruptcy law makes it more difficult for consumers to avoid paying their debts by filing for bankruptcy. It establishes a "means test" for anyone who filed and earns at least 125 percent or more of their state's median income level. In Utah that is $45,726, so only households earning more than $57,157 a year, would be subject to that means test.
The test will determine if those who file for bankruptcy can afford to pay at least 25 percent of what they owe, or a minimum of $6,000, over a five-year period. Those who can must file for a Chapter 13 reorganization and make payments rather than get immediate relief under a Chapter 7 liquidation of their assets.
To beat those tough new standards, 77 percent of Utahns who sought bankruptcy court protection last year filed for Chapter 7, compared with 69 percent in 2004. And only 23 percent filed for Chapter 13 bankruptcy, versus 31 percent in the previous year.
Utah State University Professor Jean Lown, who has studied the reasons why Utah leads the nation with one bankruptcy for every 37 households, suggests that the new law rather than helping reduce the number of filings might eventually lead to an increase.
"Only about 25 percent of Utahns who file for Chapter 13 actually complete their [repayment] plans," she said. "And many of those who don't are still in financial trouble, and some will just turn around and file again. I'm afraid that by forcing more people into Chapter 13 we're just setting the stage for some big increases in the future."
And despite the new law, the underlying reasons why people file for bankruptcy - the loss of a job, unexpected medical bills, divorce, etc. - remain, Lown said. "I just read that last year was the first since 1933 where Americans collectively spent more than they earned."
Mike Thompson, an attorney specializing in bankruptcy law with the firm of Durham Jones & Pinegar, said it is inevitable that the number of filings will begin rising again. And he expects a gradual increase in Utah filings this year.
"The new law in no way changed the fact that people need debt relief," he said.
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Tribune reporter Rosemary Winters contributed to this story.