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Bankruptcy Filings Surge Among US Consumers

American consumers' bankruptcy filings jumped 15 percent in February from the previous month and a steeper rise is looming because of the subprime mortgage crisis, the American Bankruptcy Institute said.

Consumer bankruptcy filings in February totaled 76,120, up from 66,050 recorded in January, the non-partisan bankruptcy research group said.

The February number was 37 percent higher than in the same month a year ago, according to the institute.

"February's bankruptcy spike -- the highest single month since the 2005 (bankruptcy) law changes -- forecasts the start of more to come for the balance of 2008," said Samuel Gerdano, ABI executive director.

"It is probably too early to attribute the current trend to the mortgage crisis. But if it continues -- as it is certainly expected to with adjustable rate mortgages resetting -- it could add to the bankruptcy rate," Gerdano said in an interview.

The institute is forecasting more than 1 million consumer bankruptcies in 2008, compared with about 800,000 in 2007, due mostly to heavy household debt. But the 2008 estimate could go
even higher "if this contagion affecting the home mortgage market continues," Gerdano said.

Last week, Senate Republicans blocked a Democratic-written bill that would change federal bankruptcy laws to curb rising home foreclosures.

The legislation, which lawmakers said might be reconsidered in coming days, would let bankruptcy judges reduce mortgage amounts to reflect the current fair value of the home in Chapter 13 bankruptcy proceedings. The White House threatened to veto the bill, calling it too costly.

In a Chapter 13 bankruptcy, a consumer typically must budget some future earnings to repay unsecured creditors. However, secured debt -- such as a home mortgage -- cannot be
modified under current Chapter 13 law, Gerdano said.

The institute is also seeing an increase in business bankruptcies, which account for a tiny percentage of overall bankruptcies.

"Here the scenario is a restriction in the flow of credit to troubled businesses," Gerdano said. "In recent years, there was almost excess liquidity, which propped up a number of businesses and let them stave off a day of reckoning."

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