Credit card debt continues unabated and foreclosures are on the rise, yet the number of bankruptcies nationwide and in Vermont are way down.

Bankruptcy experts say the apparent contradiction raises the question of whether debt-saddled consumers realize that bankruptcy remains an option.

On the surface, the new bankruptcy reform law that took effect in October 2005 has had the desired effect, resulting in a dramatic decline in bankruptcy filings.

In Vermont, bankruptcies plummeted 76 percent last year from the year before to just 620 cases. Nationwide, the number of filings dropped 70 percent to 617,660, the lowest since 1988

The American Bankruptcy Institute forecasts an increase in filings this year. In Vermont, 278 cases have been filed as of May 4 compared to 191 cases for the same period last year, according to the U.S. Bankruptcy Court in Rutland.

"Notwithstanding the drop in bankruptcy filings last year, many American families are still facing financial stress," ABI Executive Director Samuel Gerdano said in a statement. "Rising levels of household debt and declining home values could lead to higher bankruptcies this year."

Still, bankruptcy experts expressed concern that the low number of filings may in part be the result of the mistaken belief that bankruptcy relief is no longer available.

One lawyer said the low number of filings is especially puzzling given the rise in home foreclosures.

The Bankruptcy Abuse Prevention and Consumer Protection Act passed by Congress two years ago makes it more difficult for a debtor to discharge their debts under a Chapter 7 bankruptcy. Before taking effect in October of 2005, the publicity surrounding the law caused a surge in filings and may have left the impression that bankruptcy was no longer available to most people in need of debt relief, experts in the field said.

"I get that all the time," said Rutland bankruptcy lawyer Rebecca Rice. "There was such a hubbub when the new law was passed that people came up with the misperception that it's not out there or that it's really, really hard."

In lieu of bankruptcy, some consumers turn to debt reduction companies, Rice said, which in some cases make matters worse. "So you think you're paying people off and you're actually getting more buried because nothing is going to the creditors," she said.

The biggest asset someone has is their home. Yet, with the rise in foreclosures many debtors may mot be aware that Chapter 13 can stave off foreclosure.

Mortgage delinquencies and foreclosures in Vermont jumped in the fourth quarter of last year, but remain below the regional and national averages, according to the Mortgage Bankers Association.

Of particular concern is the surge in subprime foreclosures. The state's delinquency rate on subprime mortgages remained below the national average at the end of the fourth quarter, However, the state's subprime foreclosure rate of 4.79 percent was above the national rate of 4.53 percent at the end of the year.

A Chapter 13 bankruptcy allows a debtor to keep their home provided they have the income available to stay current with their mortgage, pay off their mortgage payments in arrears and other debts, over a five-year period.

But someone with a subprime mortgage, which often is an adjustable rate loan, winds up in a financial bind when the payments balloon. In addition, once the homeowner is in default the interest rate skyrockets making it impossible for someone to stay current on their payments let alone clean up the mortgage payments in arrears and pay off their other debts, bankruptcy lawyers say.

Using Chapter 7 to stave off a foreclosure is a less likely scenario. Chapter 7 allows someone to liquidate their debts and still keep their home. But the debtor must be current on their mortgage payments and can't have more than $75,000 in equity in their home. Someone above the median income would be required to file Chapter 13.

But unlike Chapter 13, which can halt the foreclosure process, Chapter 7 won't help once the homeowner has defaulted on their mortgage.

The new law allows someone to file Chapter 7 bankruptcy based on median income. For a single person the median income $39,651, for a couple, $52,008, a three-person household, $65,812 and for a four-person household, $73,688.

In Vermont, lawyers say that most people in Vermont fall below the median income levels and would be entitled to file Chapter 7.

"I've not had a single client that's had to file a Chapter 13 because of the median income," Rice said.

Chapter 13 filings in Vermont have increased this year, to 67 cases, representing nearly 25 percent of the court's caseload, compared to less than 10 percent last year at this time.

Rice is seeing more Chapter 13 filings in her practice, some because of foreclosure. But she said others are so far in debt that they don't qualify for Chapter 13.

Lawyers say that exacerbating the problem are debt collectors who tell consumers that bankruptcy is no longer available or a particular debt cannot be discharged in bankruptcy.

"I had someone tell me my clients couldn't file bankruptcy," Rice said.

She said that collectors who dispense such legal advice are in violation of the Fair Debt Collection Practices Act.

Rozanne Andersen, general counsel for the Association of Credit and Collection Professionals, said it's the organization's position that debt collectors "shall not provide consumers with tax advice or legal advice" but are to assist consumers in arranging a payment plan to pay off their debts.

Andersen said it is not the practice of the industry to engage in behavior that would be in violation of the law.

In one respect, the number of low filings in Vermont isn't surprising.

Over the years the state has had the second lowest number of filings per capita in the country, said Richard Scholes, a Montpelier lawyer.

But Scholes also said that the "tremendous amount of publicity that preceded the new law taking effect left the impression that bankruptcy is not available any more."

That view is shared as well by Bethel lawyer Ray Obuchowski. But Obuchowski said the low filing numbers may also be a reflection of the Vermont economy.

"It doesn't peak nor does it valley as bad as other areas," Obuchowski said.

He noted that Vermont's foreclosure and delinquency rates are below the national average. But he said that could change and result in more bankruptcies.

"If there has in fact been the same surge nationally in foreclosures, the question will become whether Vermont will see that surge in (Chapter) 13 filings to save the house in another year-and-a-half to two years," he said.

Scholes echoed the complaints of others who said some debt collectors are violating the law by giving legal advice on bankruptcy.

"Collection agents call and they often tell people, at least my client, that this debt can't be discharged in bankruptcy court," he said.

Lois Lupica, professor of law at the University of Maine in Portland, said based on anecdotal evidence there's no question that there's a perception that bankruptcy is no longer available

There was huge surge in bankruptcies just prior to the new law taking effect, followed by a steep drop in filings. But more than 18 months after the law took effect, Lupica said bankruptcy filings remain low by historical standards.

"There hasn't been a rise in numbers back to the pre-surge level and I do think one of the factors that would explain that is there was an awful lot of press about bankruptcy," Lupica said, "There was an awful lot of the sky is falling, bankruptcy as we know it is ending and it wouldn't surprise me at all if consumers had the impression that bankruptcy was no longer available."

But Lupica said while it's a more expensive and a more cumbersome process, bankruptcy is still "very much available for people who need it."

While it's too early to draw conclusions about why bankruptcies are down, Lupica said that many families are in financial distress caused by major health care expenses, loss of job and divorce.

"The economy continues to be fragile for a great number of people," she said.

One bankruptcy expert, who spoke on condition of anonymity, made the observation that simply because fewer people are filing for bankruptcy doesn't necessarily mean those in a financial distress are paying their debts. Some debt-riddled consumers, the expert said, may be "going underground," changing jobs, moving or even changing their name to avoid creditors.

Contact Bruce Edwards at bruce.edwards@rutlandherald.com.