From debt to dispossession: after abetting an unprecedented growth in both government and consumer debt, the Federal Reserve may be preparing to reduce the middle class to utter serfdom.(ECONOMY)

They came before dawn on Friday morning, gathering in cities and towns across the nation in lines that snaked down city blocks. These anxious people weren't queueing up for tickets to see Coldplay or Big & Rich; instead, they were seeking to file bankruptcy before the advent of a new, more rigorous law on October 18.

"There have been huge spikes in filings all over the country," commented Nathalie Martin of the American Bankruptcy Institute (ABI) to the Pittsburgh Business Times. "In New Mexico, there have been almost as many filings the two months before [the new law] as in the entire year. There are huge, huge increases."

Many of the debtors thronging federal courthouses were single parents overwhelmed by unsupportable credit card balances and crushing mortgage payments. More than a few were well-paid professionals who had over-leveraged themselves during the recent Federal Reserve-created credit glut. Others were small businessmen whose ventures had failed. Donald Calairo, a Pennsylvania attorney who specializes in business bankruptcies, reported a 50 percent increase in filings in the two months leading up to the new law, the so-called Bankruptcy Abuse Prevention and Consumer Protection Act.

Several large corporations also raced to beat the clock. Delphi, an auto parts manufacturer that spun off from General Motors in 1999, filed for Chapter 11 bankruptcy protection on October 8. Delphi was joined by two ailing airlines, Delta and Northwest, who filed just ahead of the deadline. Under the new law, corporations filing for bankruptcy confront severe limits in the size of severance packages for top executives: the maximum amount cannot exceed 10 times the amount paid to non-executive employees.

Obviously, people who take on debt should be morally and legally liable to pay it off, but the timing of this new law's implementation couldn't be worse. The new law imposes a "means test" based on cost of living guidelines composed by the Internal Revenue Service. Those found to have an above-average income are now barred from filing under Chapter 7, which permits debts to be expunged. They are now required to file under Chapter 13, which imposes a five-year repayment plan. Filers are also required to enter a professional credit counseling program within six months.

Facing intractable debts and rising household expenses, and concluding that bankruptcy was their inevitable destination, hordes of Americans decided to preempt the new law. In the week prior to the October 18 deadline, more than 103,000 bankruptcy petitions were filed (more than 20,000 per day), bringing the 2005 total up to 14.7 million--an increase of nearly 20 percent over 2004.

"We have never seen anything like this," commented St. Louis consumer bankruptcy attorney Barbara J. May to the New York Times. "We knew it would be an upswing, but this is pandemonium."

"Very, Very Scary" Stuff

"While the economy still seems to be pretty good, it doesn't take a lot to get people in trouble," observed ABI's scholar in residence, Nathalie Martin, to THE NEW…