(Editor's Note: This is the second in a two-part series on personal finance problems facing a growing number of Valencia County residents. Part 1, published July 28, covered the rising rate of home foreclosures in the county. This article looks at a related issue, the increasing number of personal bankruptcies.)

Perhaps no word in our society carries as much stigma as the word "bankruptcy."

People who go bankrupt are losers, failures, deadbeats who are cheating creditors out of their money; they're lazy, dishonest people who can't be trusted to live up to their word. Or so the general perception goes.

That's what attorney Laura Boyett thought, too, when, fresh out of law school, she joined a firm with two partners.

"I wasn't sure what kind of law I was going to practice," she said, "but I knew I wasn't going to do divorces and I wasn't going to do bankruptcies. I wasn't going to help people cheat their creditors."

Shortly after she joined the firm, one of the partners left. Shortly after that, the other one died. Suddenly Boyett was left with their case loads — including some bankruptcies.

"The first one I handled was an elderly woman on a fixed income," she said. "Her health costs had gone up a lot. Her rent had been raised."

She said the woman was making choices between eating and paying for her medications, or paying her rent, or paying her credit card or other bills — all going up, and all beyond her control. Bankruptcy was her only option.

That case gave her a different perspective, Boyett said, and now, 10 years later, bankruptcy law makes up the bulk of her Los Chavez practice.

She is one of two lawyers in Valencia County specializing in bankruptcy law. The other is Steven Clark in Bosque Farms. And the need for their services is growing.

The Numbers

Personal bankruptcy filings by Valencia County residents rose from 98 in 2006 to 264 in 2009, according to U.S. Bankruptcy Court records. They increased 24 percent in 2009, and through June of this year total an estimated 150 cases. If typical trends hold true, they will top 300 this year.

And, said Boyett, "There are a lot of people in Valencia County who should be filing bankruptcy that aren't."

The year 2006 is the baseline because that's the first year after Congress changed the rules and made personal bankruptcy more difficult, especially Chapter 7, which allows some of the filer's debt to be discharged after non-exempt assets have been liquidated.

The law was intended to force more people to file Chapter 13, the other personal option, which requires the debtor to repay as much of the debt as possible. To qualify for Chapter 7 under the new law, the debtor has to pass stiff standards that creditors felt few could do.

But it hasn't worked out that way. In New Mexico, more than 90 percent of bankruptcy filings meet Chapter 7 standards. That has left creditors surprised and unhappy.

Statewide, according to the court, personal bankruptcies increased about 25 percent every year since 2006. Through June, there have been more personal bankruptcies in New Mexico this year — 3,375 — than all of 2007. The number per 1,000 residents has risen from 1.7 in 2007 to 3.33 this year. Valencia County has steadily accounted for about 4.5 percent of all bankruptcies in the state, and is sixth among New Mexico counties behind Bernalillo, Sandoval, Santa Fe, Doña Ana and San Juan.

Behind The Numbers

What's fueling the increase in personal bankruptcies?

The simple answer is the economy. Boyett said almost all Valencia County filings are the result of decreased incomes, increased costs or a combination of the two.

In addition to people who lost their jobs in recent years, many others have seen hours reduced or have taken pay or benefit cuts, she said. All it takes to force them into bankruptcy is a single health crisis, a major vehicle repair or an unexpected expense.

Boyett said the tremendous increases in credit card rates and fees recently in advance of the new law that regulates rate hikes and requires greater disclosure has hit a lot of people hard, too.

National studies conclude that the average American family is as little as three weeks away from bankruptcy, and others suggest most families are one serious illness away from it.

The No. 1 cause nationally for personal bankruptcy is medical expenses, according to Investopedia, a Forbes company, which cites a study by Harvard University that found medical bills are the leading factor in 62 percent of bankruptcies. Other reports put it as high as 80 percent.

The No. 2 cause is job loss — which can lead to unpaid medical bills — followed by poor use of credit, divorce and unexpected expenses.

Boyett said that each of these causes, even poor use of credit, can be factors beyond the control, or at least beyond the education, of the debtor.

Misconceptions

"There are a lot of misconceptions about bankruptcy," she said. "I know, I had them too."

The biggest misconception is that there is a character flaw in people who go bankrupt. Not true, said Boyett, a Valencia County native.

"There are some awesome people in our county, across the board," she said. "But we don't have monied people. By that I mean people don't understand money.

"And I don't mean that as a criticism. If you've never been taught Chinese, you couldn't be expected to understand Chinese. If you've never been taught about money, about what a credit card really costs, you can't be expected to understand money. There is no class called Money 101.

"As a result, you can take some awesome people and get them in trouble very easily."

And lenders aren't going to help you understand, Boyett said, because it's their job to get you into the credit cycle. Most lenders, she said, focus on the monthly payment and not the overall cost of borrowing. It took an act of Congress to force them to disclose the costs in a simple and understandable way.

"Banks and finance companies and credit card companies are not your friends," she said. "I went from 'bankruptcy is bad,' to where I am now because I've done the numbers. When you pay back two, three, four, five times what you borrowed, and you still owe, who's cheating who?"

That, Boyett said, is why people shouldn't feel guilty or ashamed about filing bankruptcy, and why it shouldn't carry a stigma.

Donald Trump

"Bankruptcy is a money tool for folks like Donald Trump," she said. "He, or one of his corporations, files bankruptcy every couple of years. It's part of his business strategy.

"Why shouldn't the average person make use of that tool, too?"

Boyett targets credit card debt as the reason most people fall into financial difficulty. High interest rates and low minimum payments (which will be higher under the new law) allow people to get deeper and deeper in debt without realizing it.


"If everyone in Valencia County got out from under their credit card debt, there would be a tremendously beneficial effect on our county and on society," she said. "It would be better for our kids, it would reduce stress, it would probably lower the divorce rate."

Boyett said there are no hard and fast rules to tell a person whether bankruptcy is the right move for them (see sidebar for some conditions that might suggest it's worth considering), but they should talk to a bankruptcy lawyer before making any decision.

"I talk to a lot of people who say, 'My barber or my mechanic knew somebody who filed bankruptcy, and they said it was terrible and all these terrible things happened,'" Boyett said. "I have a deal with my mechanic: I won't tell people how to fix their cars, and he won't give legal advice.

"Don't listen to (non-lawyers) about legal matters."

Most bankruptcy lawyers offer a free consultation, she said, and the final decision is always the client's. A reputable attorney will not pressure someone to make an immediate decision.

"I never force anybody to do anything," she said. "Most of my clients go home and think about it, and I encourage that. It's always up to them. In the end, people have to do what's best for them."

The Downside

Bankruptcy has its negatives, which, depending on the debtor's situation, can be better or worse than other avenues. That's why a consultation with an attorney is essential.

Bankruptcy negatively impacts the debtor's credit report. A Chapter 7 filing stays on the report for 10 years, a Chapter 13 for seven, and both knock at least 50 points off a credit score. If the filer is already in serious debt trouble, that might not make much difference. Bankruptcy also remains public record forever.

While the debtor will usually have a difficult time getting credit, Boyett said many of her clients "find their mailboxes full of offers for credit cards and car loans" immediately because lenders know they can't file again for at least seven years.

In all likelihood, the filer loses some treasured assets. Under Chapter 7, they are allowed to keep certain "exempt" essential assets. This might include a home (payments have to be made, and some equity might be taken), a car (payments, again), clothing, tools used in a trade, and other personal items.

Non-exempt items (such as, say, a coin collection) are sold by a trustee and proceeds distributed to creditors. Most of the remaining debt will be discharged, except for certain debts such as taxes, student loans and child support.

It costs money to file bankruptcy. While a filer has the legal right to represent himself in court, experts agree that's foolish, and most bankruptcy judges won't allow it.

Boyett said most of her clients, once free of their debt, usually pay their bills within two months, and most lawyers are willing to set up short-term payment plans.

While you can't be fired from your job for filing bankruptcy, potential employers and other service providers, such as insurance companies, use credit reports in making decisions. A bankruptcy can influence whether you get a job or the rate you pay, for instance, for auto insurance. Again, that might not be much of a difference for someone in serious debt trouble.

A credit counseling course is required within six months of filing bankruptcy, even for people whose debt problems were caused by unforeseen events such as lost job, medical expenses or temporary financial problems.

In the end, however, bankruptcy laws were originally written to protect consumers. If, in consultation with an attorney, a debtor determines that the benefits of bankruptcy outweigh the downsides, then it might not be the worst option.

As Los Lunas mortgage banker Dee Tomlinson, who counsels homeowners who might be facing foreclosure and sometimes refers them to Boyett for consultation, puts it: "What's most important right now is surviving these economic times, and if that means bankruptcy is your best or only option, so be it."

Contact Dana Bowley