Bankruptcies surge on Long Island

The number of personal bankruptcies on Long Island is way up in 2008, another sign that mounting mortgage defaults and the climbing prices of necessities like food and energy are taking a toll on locals.

Long Island saw 2,154 bankruptcy filings in the first four months of the year, up 9.8 percent

Most of those were Chapter 7 bankruptcies, which wipe out all debts and essentially give the filer a fresh start. Chapter 7 filings totaled 1,456 from January to April, up 15.4 percent compared to the prior September-to-December period.

It seems many of these distressed consumers are being pushed over the edge financially by slow job and wage growth, and the burst housing bubble. Also thousands of Long Islanders whose home prices have declined are finding they have little or no equity left in their homes to draw on.

"When the economy is in recession, or even in subpar growth, all the borrowings that people made in the good times come back to haunt them," said Pearl Kamer, chief economist at the Long Island Association.

Jeffrey Wurst, partner and chair of the financial services, banking and bankruptcy department at Ruskin Moscou Faltischek in Uniondale, said the run-up in bankruptcies is also attributable to the increasing number of foreclosures on the Island.

Many homeowners have turned to bankruptcy as a way to stall foreclosure filings, which jumped 11 percent on Long Island in the first quarter compared to the prior-year period.

"You can literally file a bankruptcy case five minutes before the auction is about to go off and stop a foreclosure proceeding," said Pat Collins, chair of the bankruptcy law committee for the Nassau County Bar Association.

The bank must then file its own petition to remove the freeze on the foreclosure, a process that can take 30 to 60 days, Wurst said, adding this gives the homeowner a chance to work with a bankruptcy advisor, devise a payment plan and potentially keep the house.

Apart from Chapter 7 filings, a few desperate Island homeowners in default on their mortgages have also filed Chapter 13 bankruptcies, which allow them to devise a payment plan for the next three-to-five years to repay debts. In April, 184 Long Islanders filed for Chapter 13 bankruptcy, according to the bankruptcy courts.

Collins said defaulted homeowners use this type of filing because it allows them to repay missed mortgage payments over a certain period of time.

But Chapter 13 filings have remained flat since October, which is troubling in combination with escalating Chapter 7 filings because it means less Islanders are able to come up with workable payment plans, Wurst said. "If we're seeing reorganization, it's a reflection that there's at least some recovery going on," he said.

But despite the growth in filings, Kamer said the number of Islanders in bankruptcy is still a fraction of the total population.

While bankruptcies are a drain on the economy because they slow consumer spending, she said the critical issue for Long Island is still the glut of foreclosures.

But neither Collins nor Wurst sees an end to the run-up in personal bankruptcies. "I think the Long Island economy is more resilient than other areas of the country, but we still expect a general increase in all types of bankruptcies through the economic downturn," Collins said.

Credit: Laura Glasser