Bankruptcy filings have risen by 33% over 2008 with 1,064,927 consumers seeking bankruptcy as a way to cancel debt, according to a new report. Figures for 2007 were considerably lower with 801,840 consumers filing for bankruptcy.

The report published by the American Bankruptcy Institute snaps America’s financial woes into focus and paints a miserable picture for well over a million consumers. ABI also warned that they anticipate bankruptcy filings to continue rising well into 2009.

A struggling economy has put great stress on consumers who find it difficult to make debt repayments and at the same time meet the cost of living. The increase in bankruptcies for 2008 has quashed the belief that the reforms of 2005 under The Bankruptcy Abuse Prevention and Consumer Protection Act had made Chapter 7 bankruptcy too expensive for debtors to consider.

When President Bush signed the bankruptcy reform act in 2005, a wave of consumers applied for Chapter 7 bankruptcy before the new restrictions took affect.

As a result the number of consumer bankruptcy filings soared by 32%. After The Bankruptcy Abuse Prevention and Consumer Protection Act took affect insolvency filings fell by around 70% in 2006. Have the Bankruptcy Law explained, click here.

Current economic conditions have however forced consumers into bankruptcy despite the 2005 reforms.
It is expected that 2009 will be a year in which more consumers rely on bankruptcy as a means of clearing unmanageable debt.

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The Economic Crisis

“We must move forward, quickly and aggressively, with a middle-class rescue plan that will create jobs, provide relief to families, help homeowners and restore our financial system.” Obama

The good news for savers is that Obama wants to allow access to retirement plans without early-withdrawal penalties. Other initiatives the new president will seek to implement when he takes office in January 09, include:

• Allowing penalty-free early withdrawals from IRAs and 401(k)s of up to 15% of the balance but not more than $10,000.
• Giving temporary tax credit of $3,000 in 2009 and 2010 to companies for each new full-time employee it hires in the United States.
• Temporarily eliminating taxes on unemployment benefits.
• Requiring financial institutions that are participating in bailout to put a 90-day moratorium on foreclosures for homeowners “acting in good faith.”
• Letting federal government lend to state and municipal governments to help counter the budget crunch faced by states due to the mortgage crisis.

Wealth Tax

“We’ve lost the balance between work and wealth. I will close the carried interest loophole, and adjust the top dividends and capital gains rate...” Obama

Obama wants to make the tax code more progressive, so as president he intends to:

• Tax carried interest as ordinary income rather than as an investment gain, thereby subjecting it to much higher tax rates than 15%.
• Freeze the estate free tax exemption amount at $3.5 million (the 2009 figure).
• Freeze top estate tax rate at 45%.
• Raise capital gains and dividend tax rates to 20% from 15% for couples making more than $250,000 and singles making more than $200,000.

Mortgages

“I recognize that intervention is necessary to maintain liquidity for the housing market so that homeowners can continue to get affordable mortgages and homes can be bought and sold in neighborhoods across the country.” Obama

Obama backed the federal government takeover of the mortgage insurance giants Fannie Mae and Freddie Mac.  Furthermore, however, as president Obama:

• Wants to void any inflated windfall payments being paid to outgoing CEOs and senior management.
• Wants to prevent shareholders from benefiting as a result of a takeover.
• Has said companies should operate as government agencies or as private businesses.

Taxes

“We shouldn’t be distorting our tax code to benefit a few powerful interests – we should be insisting that everyone pays their fair share, and when I’m president, they will.” Obama

Obama’s personal tax proposals are set to befriend the lower-income earners more than wealthy taxpayers. As president, Obama wants to:

• Leave all tax cuts in place for everyone except couples making more than $250,000 and single filers making more than $200,000. Those high-income groups would see their top two income tax rates revert to 36% and 39.6% from 33% and 35% respectively.
• Provide $1,000 tax cut for working couples making less than $250,000.
• Introduce other tax breaks for lower and middle-income households.

Savings

“Personal saving is at an all-time low. A part of the American dream is at risk.” Obama

Obama intends for his government to augment low and middle-income workers’ savings that will:

• Require employers that don’t offer retirement plans to set up IRA-type accounts.
• Require companies to automatically enroll their employees in 401(k)s or IRAs.
• Provide a federally funded match on retirement savings for families earning below $75,000.
• Temporarily suspend mandatory withdrawals from retirement accounts for senior citizens aged 70 plus.

Budget Deficit

“Once we get through this economic crisis ... we’re not going to be able to go back to our profligate ways. We’re going to have to embrace a culture and an ethic of responsibility, all of us, corporations, the federal government, and individuals out there who may be living beyond their means.” Obama

The US government has thrown over $1 trillion towards stabilizing the financial system and despite this, economic growth is still expected to slow. As president, Obama is going to tackle the country’s growing deficits and has spoken of the need to restore fiscal responsibility but at the same time promising more tax cuts. Critics have said that his spending cut proposals are unrealistic. However, Obama wants to:

• Enforce budget rules that would require future spending to be paid for by cuts to existing programs or by new revenue channels.
• Reduce spending on earmarks to no greater than 2001 levels and require more transparency on spending.
• Help pay for new proposals by drawing down troops in Iraq war, raising taxes on high-income filers and cutting certain corporate loopholes.

Wall Street

“Let me be clear: the American economy does not stand still, and neither should the rules that govern it. The evolution of industries often warrants regulatory reform...” Obama

Obama has continually stressed the need for greater transparency on Wall Street and to enforce this he intends to impose capital requirements on financial institutions. Obama wants to:

• Impose liquidity and capital requirements on investment banks.
• Streamline regulatory framework of the financial services sector.
• Create an oversight commission that would advise the president, Congress and regulators on the health of and risks facing financial markets.
• Give Federal Reserve supervisory power over any bank that borrows from it.

Foreclosures

“...If the government can bail out investment banks on Wall Street, then we can extend a hand to folks who are struggling on Main Street.” Obama

Obama wants the government to step in to help homeowners facing foreclosure and plans to do this by:

• Allowing troubled homeowners to refinance to a loan insured by the Federal Housing Administration.
• Requiring financial institutions participating in the Treasury’s Troubled Asset Relief Program to put a 90-day moratorium on foreclosures for homeowners “acting in good faith.”
• Creating a 10% tax credit for homeowners who do not itemize their taxes.
• Creating a $10 billion fund to help victims of predatory loans.
• Authorizing bankruptcy judges to reduce mortgage principal.

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Unsurprising, predictable and inevitable. Three words that can be used to describe the eventual approval of the $700bn rescue package, which only four days prior was rejected by the House of Representatives.

This time, the House’s voted 263-171 in favor of the deal, a clear reversal of fortunes for the early proponents of the bill and Wall Street. As President Bush signed the bill that gives the Treasury every chance of stabilizing the economy, some were left wondering what caused such a u-turn.

Republican Lee Terry summed up the change in sentiment when he said: “Those greedy pigs on Wall Street don’t deserve help from hardworking Americans but allowing them to fail will cause so many other businesses . . . to lose access to credit, lose business.”

It was the Dow Jones kamikaze 777 point drop in the wake of the first No vote that gave everyone, proponents and objectors alike, a sharp wake up call. Most agreed Wall Street started crumbling under the weight of her own greed, but to stand back and watch it fall wouldn’t be in anyone’s interest.

“We have acted boldly to help prevent the crisis on Wall Street from becoming a crisis in communities across our country,” Bush said.

A bold move indeed, especially seeing as the American public will be footing the bill at a time when unemployment is reaching highest level in nearly two decades.

What does the $700bn bill mean?

The 451-page Emergency Economic Stabilization Act grants the Treasury secretary unprecedented authority to buy up to $700 billion of troubled assets from ailing financial institutions in an effort to stave off more bankruptcies and provide cash for new loans to ease the credit market freeze-up.

The credit market, which businesses rely on for lending and borrowing, is hoped to thaw out and add much needed buoyancy to the economy.

The revised bill

Lawmakers demanded numerous changes to the Treasury Department’s original, three-page proposal, including limits on how much executives may be paid if their firms sell assets to the government. Congress also added an oversight board to supervise the program and raised the cap on Federal Deposit Insurance Corp. account coverage from $100,000 to $250,000. They also insisted on steps to help homeowners avoid foreclosure.

Sweeteners added an estimated $150 billion in costs, including a provision that shields 24 million taxpayers from the alternative minimum tax. The new law also has tax relief provisions for disaster victims; research and development tax credits; a hybrid car tax credit; and tax breaks for teachers who spend their own money on school supplies.

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The stock market and its investors were hinging more than their hopes on the £700bn rescue package prepared by the Bush Administration. They were also hinging the prosperity of their securities on a bailout deal aimed at throwing the US economy a lifeline. 

As news reached the trading floor in NYSE that the House of Representatives had rejected the bill, there was no stopping the markets going into freefall as investors clambered to cash in their chips.

The result? The markets lost a staggering $1.2trillion in the 7.5 hours between the opening and closing bells.

How the markets got hit

The broad market sank by 9 percent, which is only its third worst decline since World War II. The Dow Jones industrial market average fell 778 points (7%), which marks a significant low when compared with the 684 points lost after 9/11.

Come close of play, the broader stock indicators also tumbled as Standard & Poor’s 500 index reported a decline of 106.62, (9 percent) - its largest hit since the week after the October 1987 crash.

The Nasdaq composite index fell 199.61, (over 9 percent), marking its third-worst decline ever. The Russell 2000 index of smaller companies fell 47.07, (6.7 percent). 

The NYSE had never seen a mass sell-off quite like it. A decline of almost 500 points within minutes sent shockwaves through the markets as traders gaped at television screen unable to fathom what had happened in Washington.

Credit markets on ice

The Federal Reserve and central banks began to think the unthinkable as Capitol Hill banned the bailout. Even before the House of Representatives lodged a vote, central bankers tried to jump-start the credit markets by offering hundreds of billions of dollars in loans to banks across the globe. Despite the offer, neither the stock nor the credit markets – lending between financial organizations – were responding.

Bad news travels to Europe

Shortly before 4 pm Fortis was being partly nationalized as Belgium, the Netherlands and Luxembourg agreed to invest $16.2 billion rescue the big bank. Belgium took ownership of 49% of the bank. A few hours later, it was the Germans government’s turn to save Hypo Real Estate, a commercial property lender with a $43 billion buyout. Iceland bought a 75 percent stake in Glitnir Bank hf.

Some hours later the British Treasury seized the mortgage provider Bradford & Bingley. In Tokyo, early trading on Monday saw Asian markets sell-off as the drama made it’s way across the globe.

Nationalization like this is turning the financial world red and it is only the beginning. If these trends continue, it is highly likely that the State will own your house and not big banks.

Last chance saloon

As lawmakers and house representatives asses the revised rescue package on Thursday (10/02), the world will be watching America to see if it can reverse the trend that has caused widespread fear across the global economy.

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President Bush’s $700 billion rescue deal to bail out Wall Street was turned down by the House of Representatives on Monday (9/29), as both Republicans and Democrats rejected the package by 228 to 205 votes.

Representative from both parties criticised the bailout package calling it ‘hasty’, ‘fear fuelled’ and ‘extortion’. Fingers have been pointed at both the Bush Administration and Wall Street with some even suggesting the two should be asking for bail instead of bailout.

The bill was aimed at giving the economy a ‘shot in the arm’ in a bid to reverse a downturn that began with the sub-prime mortgage crisis. The $700bn of taxpayers’ money would have relieved the many banks burdened by bad mortgages loans and give the crippled housing market a chance to recover. The political consensus, however, says that taxpayers should not be asked to ‘clean up Wall Street’s mess.’

Market Freefall

After the votes had been cast, news from Washington filtered through the stock market in New York City leaving shocked traders looking on helplessly as stocks dopped 7%. Few had predicted such an outcome but it was still someway off Black Wednesday’s 22% drop in 1987. However this kind of statistic could offer little comfort to today’s investors as the Dow Jones fell by 780 points - a single day record.

The Nasdaq composite index fell 199.61, more than 9 percent, its third-worst percentage decline. Link to Stock Market Meltdown.

Wider implications

As much as 160 companies are on the brink of defaulting, according to Standard & Poor, who say unless a rescue package is implemented, companies including United, General Motors, Six Flags and Trump Entertainment Resorts will go to the wall in the next 12 months.

Fears the country’s 6.1% unemployment rate could increase significantly over the coming months, if not weeks, look to be well founded as thousands of small firms (who don’t make the headlines) are forced to lay off staff.

The days ahead

Lawmakers are already reconvening with a view to thrashing out a revised rescue package that is expected to go to the House of Representatives on Thursday (10/02). The details of this second proposal, as yet unknown, will determine whether the President, the stock market and the world at large can breathe a sigh of relief, or whether an already grim situation is set to get a whole lot grimmer.

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