Personal Bankruptcy Filings Likely to Spike Amid Florida Housing Market Decline

Going broke has fallen on hard times these days.

In the year since a tougher federal bankruptcy laws took effect, personal bankruptcy cases have plummeted, as consumers must clear more hurdles than ever before in order to get a financial fresh start after absolving themselves of debt through the courts.

That’s a stark contrast to previous years, when personal bankruptcy filings hit record levels, peaking last October as hundreds of thousands rushed to file before the stricter law took effect October 17.

But despite the law’s fallout, many experts say it may be only a matter of time before going broke is thriving again, thanks largely to massive debt from adjustable-rate mortgages taken on during the housing boom.

The Orlando Sentinel reports that homeowners, especially those with what are known as interest-only or “teaser-rate” Florida mortgages, could see monthly payments more than double.

“Some just won’t be able to make the new monthly payments,” said Jules Cohen, an Orlando bankruptcy lawyer. “They’ll get 2-3 months behind, and you’ll see a lot of them file Chapter 13 bankruptcy in hopes they can set up a debt-payment plan and prevent foreclosure.”

Interest rates will rise on about $300 billion in adjustable-rate mortgages this year alone, according to First American Real Estate Solutions. That figure is projected to leap to more than $1 trillion in each of the next two years as more homeowners feel the heat and struggle to pay the Florida mortgage each month.

Consumer lawyers say they are already beginning to see some “victims” of bad real estate investments during the housing boom.

Jonathan Alper, a bankruptcy lawyer in Heathrow, said a couple who recently visited his office faced insolvency after buying two $400,000 properties as investments. With annual household income of only $75,000, the couple quickly defaulted on both Florida home loans. They blamed the ill-advised venture on tips from a “wealth-in-real-estate” seminar.

“Overall, the real estate issue is going to be a big problem in the bankruptcy system. We haven’t seen that much yet, but it is coming. Real-estate lawyers tell me there are a lot of their clients in trouble these days as buyers try to get out of deals before closing,” Alper said.

There may be signs that Florida real estate troubles are already having an effect. The latest numbers show that bankruptcies are beginning to climb again. New cases in Florida’s Middle District, for example, rose 31 percent from the first quarter to the second quarter this year, the court reported. Last year, cases were up only 13 percent in that period.

“Most people think it’s just a matter of time before the number of people filing bankruptcy gets back to a normal level,” Orlando bankruptcy lawyer Doug Neway said.