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Bankruptcy filings fell by 70 percent in 2006

/ Source: The Associated Press

A year after a massive reworking of bankruptcy laws went into effect, the number of bankruptcy filings nationwide dropped last year to the lowest level in nearly 20 years, though experts say they could rise again this year.

The total number of bankruptcy filings last year dropped by 70 percent to 618,000, down from a record of 2.1 million in 2005, when people were rushing to make filings before the new laws took were put in place, according to statistics released Monday by the Administrative Office of the U.S. Courts.

Total filings were highest in the fourth quarter, according to the court statistics. Business filings dropped by 50 percent to about 20,000. Personal filings dropped by 71 percent to about 598,000.

The number of filings last year was the lowest since 1988, the Alexandria, Va.-based American Bankruptcy Institute said in a statement Tuesday.

Samuel Gerdano, the group's executive director, said in a statement that the drop from 2005 was "almost entirely due to the after-effect of the 2005 law changes,"

But as household debt levels remain high, Gerdano said, "most expect consumer bankruptcies to bounce back by the end of this year."

Banks and credit card companies supported changing bankruptcy laws, arguing that people with the ability to repay at least a portion of the money they owed were walking away from all their debts. But opponents said the changes would keep people overwhelmed by medical costs or loss of a job hopelessly in debt for the rest of their lives.

Now that the reforms have been put in place, consumers have shifted away from filing for bankruptcy under Chapter 7 of the bankruptcy code, which allows consumers to get rid of some debt, and toward Chapter 13, which allows debtors to pay some of their future earnings to creditors, the bankruptcy institute said.

This shift, the group said, was due to more stringent requirements for Chapter 7 filings.

Last week, consumer groups called on Congress to reform bankruptcy laws to make it easier for families stung by these housing market's bust to file for bankruptcy and keep their homes.

Homeowners who file for bankruptcy can easily lose their homes under current U.S. law because mortgage lenders have a higher priority than almost all other creditors, the groups said.

The National Association of Consumer Bankruptcy Attorneys said that 80 percent of 640 bankruptcy lawyers surveyed nationwide this month said the 2005 reforms are adding to the challenges borrowers facing foreclosure confront in efforts to keep their homes, amid the housing market's downturn.