Bankruptcies on the decline [Honolulu Star-Advertiser (HI)]

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The number of people filing for bankruptcy in Hawaii fell in November for the eighth month in a row, although overall filings remain at historically high levels.

There were 242 filings in November, down 26 percent from the 327 cases filed the same month a year ago, according to data published Thursday by U.S. Bankruptcy Court. The number of new filings has declined on a year-over-year basis in every month this year except March, when filings rose by a statistically insignificant 0.3 percent.

Through the first 11 months of the year, bankruptcy filings in Hawaii totaled 3,115, down 14.6 percent from the same period a year ago. Despite the decline, the level of filings is still above where it was in 2004 before a flurry of filings in 2005 that coincided with a change in the federal bankruptcy laws.

"I am seeing a decline in filings in my office, but there are a couple of factors behind the numbers that don't bode well for the future," said Edward Magauran, a bankruptcy attorney in Honolulu.

"People are still treading water. They've been doing it since Lehman Bros. collapsed," Magauran said. "The reality is there will always be people getting sick, people losing their jobs. I don't think the numbers will change much in the near term," he said.

A change in state law earlier this year designed to slow the flood of mortgage foreclosures could end up forcing more homeowners into bankruptcy, Magauran said.

The vast majority of residential foreclosures in Hawaii in recent years have been conducted out of court through a nonjudicial process because it was quicker and cheaper than going through court. The law was changed in part because the nonjudicial foreclosures left borrowers with little opportunity to contest repossessions even in cases where they believed a lender was improperly taking their home.

However, homeowners forced into a judicial foreclosure could end up with a deficiency judgment against them that they could have avoided in the nonjudicial process. Homeowners saddled with the deficiency judgment could end up filing for bankruptcy as a result, Magauran said.

"It's not good for people facing foreclosure. It was a good idea, but in practice it can hurt a lot of people," he said.

One of the benefits of filing under Chapter 13 of the bankruptcy code is that debtors can save their home, according to Magauran. Some homeowners with second mortgages that file for bankruptcy are using a technique called "lien stripping" that allows them to cancel the second mortgage and keep their home under certain circumstances, he said.

To qualify, homeowners filing under Chapter 13 must owe more on the mortgage than the appraised value of the home. After "stripping" the second mortgage, the homeowners must also agree to repay the first mortgage on schedule.

Credit: Alan Yonan Jr.