More Nevadans going bankrupt

By Nicole Lucht / Staff Writer

Bankruptcy, chapters and verse Chapter 7 What it is: A repayment plan is not filed under this code. Instead, the bankruptcy trustee gathers and sells the debtor's nonexempt assets and uses the proceeds of such assets to pay creditors in accordance with the provisions of the bankruptcy code. Also, the code will allow the debtor to keep certain exempt property, but a trustee will liquidate the debtor's remaining assets, distributing the proceeds to creditors. How it changed under the reform : Prospective filers must meet a complex means test to determine if they are eligible for Chapter 7 bankruptcy. If the means test is failed, it is considered "presumptive abuse" and the debtor either has to file for Chapter 13 or not file at all. Chapter 11 What it is : Commonly referred to as "reorganization" bankruptcy. Most used by businesses so that the business is not lost. When a petitioner files for Chapter 11, that debtor becomes a "debtor in possession," permitting the petitioner to keep possession and control of its assets while going through a reorganization. A case trustee is usually not appointed. Once the debtor's plan of reorganization is confirmed, the debtor's case will be dismissed or converted to chapter 7, or a chapter 11 trustee is appointed. Generally, the debtor in possession operates its business and does much of the functions a trustee would perform in other chapters' cases. For individuals, Chapter 11 is similar to Chapter 13. Chapter 13 What it is: Chapter 13 allows people who earn regular income to create a plan to repay all or part of their debt. Debtors propose a repayment plan and make installments to their creditors over three to five years. If the debtor's current monthly income is less than their state's median income, the plan will typically be for three years. If the debtor's income over the past six months is greater than the state's median income, the plan usually is for five years, but no longer than that. Chapter 13 allows individuals to potentially save their homes from foreclosure, so long as mortgage payments are made as agreed. Debts are consolidated and payments are made to a trustee. In Nevada, the 2006 median income is $56,258 for a two-person family. Sources: U.S. Courts, U.S. Census Bureau and the Congressional Research Service

The number of Nevada bankruptcy filings grew more than twice as fast as those filed in the United States as a whole, according to data released by the federal judiciary.

But a Nevada bankruptcy judge said that changes in federal bankruptcy rules helped exaggerate the increases, in Nevada and nationwide.

During the first half of 2007, filings in Nevada jumped by 113 percent, to 4,922 from 2,310, when compared with the first half of 2006.

During the same time period filings nationwide increased 48.2 percent.

California bankruptcy filings grew by 97.5 percent, while Arizona lagged behind the national rate of increase, up 26.8 percent.

But the half-year-over-half-year comparisons are skewed, said U.S. Bankruptcy Judge Bruce Markell, since there was a significant drop-off in filings nationwide as debtors raced to the courthouse to file bankruptcy papers before reform was instituted in late 2005.

He said recent comparisons of Chapters 7 and 13 filings are distorted because in 2005 there was a rush of people filing Chapter 7, while in early 2006, numbers dropped because many of those who otherwise may have waited to file had already done so in the previous year's rush.

In April 2005, the Bankruptcy Abuse Prevention and Consumer Protection Act was passed and signed. The act made it more difficult to file for Chapter 7 bankruptcy and established rules as to who could file. Those not eligible were instructed to either file for reorganization under Chapter 13, or not file.

Markell said he has seen a significant increase in filings in the past year.

"We're coming back close to where we were in 2004," he said.

These days Markell is still seeing more Chapter 7 filings than Chapter 13, estimating that 20 percent more people file Chapter 7 than file Chapter 13.

As for businesses filing Chapter 11 reorganization, Markell said figures for those filings rest at about one-half of a percentage point of all filings.

Chapter 11 filings allow for a company or individual's debt restructuring.

"Typically, it's a small number of really large cases," Assistant U.S. Trustee August Landis said of Chapter 11 filings.

The Silver State has had fewer Chapter 11 filings than other states in other regions, although there has been a "significant increase" in those this past year, from September 2006 to September 2007, Landis said.

Landis, who works out of the Las Vegas field office, monitors cases as they come in to preserve the integrity of the bankruptcy system.

The Trustee office is a component of the U.S. Department of Justice.

Much of the increase in business bankruptcy filings can be attributed to failed real estate developments and entrepreneurs, he said.

Although total bankruptcy filings dropped after October 2005, when the new bankruptcy rules took effect, the number of filings are continuing to rise, and some say filings are set to reach 2004 levels.

"We're seeing a return to the ordinary flow of business in the courts," Landis said.

Filings in Nevada are down 48.2 percent, when comparing the first half of 2004 to the first half of 2007, the most recent figures available.

Still, bankruptcy reform is working, Landis said.

"Reform does help," he said, adding that the legislation provides for effective tools, such as the means test, in ferreting out abuse of the system. "The bankruptcy is not as simple. You don't just file a piece of paper and not pay your debts anymore."

The means test, which is used by the court to determine whether someone is committing bankruptcy fraud, only weeds out about 10 percent of prospective Chapter 7 filers, Markell said.

With the number of foreclosures in the Las Vegas Valley, people may try to save their house, or even their vehicle from repossession, before losing it to a creditor, the judge said.

But because debtors don't have to give a reason for filing for bankruptcy, Markell said he isn't completely sure what is leading to the high levels of bankruptcies in Nevada.

"The whole thought of bankruptcy is to freeze everybody's rights," Markell said.

The reform hasn't created a windfall for creditors, said Nate Thompson, a spokesman for ACA International.

ACA is an association representing professionals in the credit and collection industry. The association agrees bankruptcy filings are returning to pre-reform levels after a short decline that followed the filing surge before the new bankruptcy rules took effect.

Nicole Lucht covers health care, workplace and banking issues for In Business Las Vegas and its sister publication, the Las Vegas Sun. She can be reached at (702)259-8832 or nicole.lucht@lasvegassun.com.

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