More Individuals Rely on Erasing Debt

Personal bankruptcy filings swelled by 32 percent in 2009 as more consumers battled job losses and foreclosures. Specifically, more people in higher income brackets filed for Chapter 7 bankruptcy protection, which allows debtors to pay off part of their debt through selling their property to creditors, and having the remainder forgiven. "Expenditures that were rational when these people were working at the peak of their salary just are no longer sustainable when they lose jobs or take jobs at a third or a half of what they were making before," one bankruptcy attorney said.

The number of Chapter 7 petitions were up 42 percent in November 2009 compared with the same month the year before. The total number of petitions submitted reached 1.41 million, the highest number since 2005 when Congress overhauled federal bankruptcy laws. The reform increased costs associated with Chapter 7 filings, thereby encouraging Chapter 13 filings, where debtors budget future earnings to pay off creditors.

The rise in Chapter 7 bankruptcies was more dramatic in regions hardest hit by the recession. For example, Arizona had an 80 percent increase in filings from the previous year, the largest of any state. Next were California, Wyoming, Nevada, and Utah, each with about 60 percent in increases.

Could these developments warrant a new round of government intervention? Or will bailouts remain an antidote reserved for large firms?