Being bankrupt is defined as "declared in law unable to pay outstanding debts." People, businesses (including banks), and even cities can find themselves in this condition. The first lasting and permanent bankruptcy law in the United States - The Bankruptcy Act - was passed in 1898. The Supreme Court, in interpreting that law, stated that "it gives to the honest but unfortunate debtor... a new opportunity in life and a clear field for future effort, unhampered by the pressure and discouragement of preexisting debt." This is the essential idea of bankruptcy: to give debtors who qualify the opportunity at a fresh start financially. The fresh start idea has been the driving policy behind bankruptcy for the last century.
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Bankruptcy code, like almost any federal code, has grown very dense and complex since its enactment. The code outlines all of the types of, requirements for, and exceptions to bankruptcy. In the beginning, bankruptcy was mostly geared toward failing businesses. It is now used extensively by consumers who, for a variety of reasons, are unable to pay back their debts. While it provides significant relief to numerous people, bankruptcy can at times be very draconian in limiting the personal and real property debtors are allowed to retain as part of their fresh start. Floridians are particularly limited when compared with other states as to what personal property they can keep though Florida does have a very liberal homestead value exemption. The personal property exemption in Florida for someone who wants to retain her home is $1,000.00 plus $1,000.00 in vehicle equity. That amount was set over 30 years ago when it was a more reasonable number for a fresh start. Now it does more to punish people who have paid for their vehicles and personal assets such as furniture and even engagement rings. By way of comparison, federal exemptions include $16,000.00 for personal assets but limit homestead exemptions.
Bankruptcy is not inexpensive and can be a very stressful process for families or individuals. As part of their case, debtors are required to turn over numerous financial records and answer questions about their financial history. Those answers, along with information about their debts and income, become part of the public record and may be subject to scrutiny by any party in interest. Why, then, have record numbers of bay area residents filed for bankruptcy since 2009?
The busiest year in the history of bankruptcy in Tampa was 2005. That year, the bankruptcy code was updated and a huge number of people filed cases before the changes took effect. The biggest change was that Congress inserted a "means test" as part of qualification for bankruptcy. A lot of people who had been considering bankruptcy were afraid they would not qualify once the means test was in place and they rushed to file. The second busiest year was 2010. Courtrooms and hearing rooms were full to overflowing, judges and trustees were overworked, and attorneys stayed late at their offices preparing and filing cases. In 2009-2010, the Tampa bankruptcy court was one of the top five busiest in the nation. This rush to bankruptcy was a direct result of the financial crisis of 2008.
By now, everyone not living under a rock knows that in 2008 banks and investment firms were rocked by a financial disaster that resulted from myriad poor decisions (to put it mildly). The ripples from this crisis hit the bay area in a very real and tangible way. A number of industries were impacted by the crisis. Among the hardest hit were, construction, real estate, trucking, sales of consumer goods and services (catering, aesthetic services, lawn care, janitorial, masonry, contracting, etc.), and professional services. Many and many many other types of trades were also impacted. Small and even medium sized businesses folded or cut back workforce hours. Even a number of state and federal employees lost their jobs.
As people lost income or even their entire livelihood, many of them became unable to pay various types of debts. This was particularly true of mortgages. At the same time income was decreasing, countless adjustable rate and other "creative" mortgage types began increasing monthly payment amounts for homeowners. Home values, now universally accepted to have been inflated, fell dramatically. The foreclosure rate began to skyrocket. In a new twist for this area, where real estate value has tended to increase year after year, foreclosures resulted in deficiency debts. A deficiency debt is the difference between the value of the home at the time of foreclosure and the amount of debt owed to the mortgage company. A homeowner with a $200,000.00 mortgage and a home taken back by the bank that is worth $140,000.00 stands to face a deficiency judgment by the bank of $60,000.00 that can be collected by garnishing pay and bank accounts among other things. If that same homeowner had a second mortgage on her house for $20,000.00, she would face the threat of a second lawsuit and judgment. In these circumstances, homeowners have turned to bankruptcy for protection from deficiency judgments as well as lawsuits filed by credit card companies or other creditors.
The mortgage crisis has hit Florida extremely hard. For about two years, the foreclosure rate was in Florida was second only to that of Nevada. Foreclosures have been highest in Florida's most populous areas including the bay area. As foreclosures and consumer debt have decreased, bankruptcy cases have likewise decreased. However, the bottom has not yet been reached and recovery will be a while in coming. There are encouraging signs but for many in the bay area, bankruptcy is still their last, best option at a fresh start.
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