In California, bankruptcy cases soar

The saddest hour of Mary Smith's day started at 4 p.m. inside a hearing room at U.S. Bankruptcy Court in Sacramento, Calif. In just minutes, she would publicly reveal to everyone assembled how deeply mired she is in money problems.

Smith, a substance abuse counselor and mother of two, owes $38,000 to credit card companies, her checking account is frozen, and the local utility provider is threatening to turn off the lights on the home she shares with her disabled mother, uncle and her two teenagers.

Her brief appearance in Bankruptcy Court in April resulted from kidney cancer, which forced her to take disability leave.

Congress three years ago passed a law that raised new hurdles for filing bankruptcy. But as the housing downturn turned into a credit crunch, thousands of Californians have learned how to clear the barriers and the number of filings has soared.

The caseload for California's Eastern District shot up 82 percent in the first quarter. Last year, filings nearly doubled to more than 17,000.

Bankruptcy clerk Richard Heltzel estimates that the court could see more than 30,000 filings this year. He said he hasn't seen so many filings since the dot-com collapse in 2000.

Debtors are facing tremendous pressure from credit card and medical debt, Heltzel said.

Behind the numbers is a lengthy, emotionally draining and often expensive process that involves several court appearances.

If successful, it ultimately ends in a discharge of some or all of the debts. Individuals who go through Chapter 13 bankruptcy protection get to keep their property and pay debts over time. But those who file for Chapter 7 must relinquish certain property and sell it to pay creditors.

The process begins with mandatory financial counseling sessions, and a bankruptcy petition can be thrown out if the counseling sessions aren't completed.

Early in the process, many petitioners find themselves just where Smith was -- at a hearing with a trustee examining her financial affairs. The meeting lasted less than 10 minutes but snatched away the veil of composure she had worn into the room.

One bit of unexpected news brought her to tears: Her $5,300 federal tax refund would have to be surrendered.

Smith now faces a meeting with creditors. She already has filed to shield her home from lenders. Creditors will have an opportunity to challenge the asset exemption, and the court will determine whether her case will be discharged and whether she will be relieved of her debts.

For cash-strapped individuals, a bankruptcy filing also entails spending even more money. It costs $299 to file a Chapter 7 bankruptcy petition and $247 for Chapter 13.

The court limits attorney fees to $3,500 when they work on Chapter 13 cases for individuals but allows them to apply for additional pay if they exceed the cap. In Chapter 7 cases, there is no cap.

There's also the time that filers must spend on court and counseling sessions.

Bankruptcy trustee Prem Dhawan runs a tight schedule, clipping through up to 20 filings a day, typically spending no more than 10 minutes per case. He sometimes upbraids attorneys who arrive unprepared.

Bills began spiraling out of control for Smith after she parted ways with her husband. Living on disability, she was hard-pressed to make it after she lost her husband's income and family members became ill.

"I've never lived exorbitantly or beyond my means," Smith said. "But I had to make this more manageable. I didn't want to do it."

In February, she filed the paperwork to launch her bankruptcy proceedings. Two months later, she appeared before Dhawan.

Despite the painful episode at the trustee's hearing, Smith says that filing for Chapter 7 is "about getting a second chance, another starting point."

(E-mail Darrell Smith at dvsmith(at)sacbee.com)

(Distributed by Scripps Howard News Service, www.scrippsnews.com.)