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Bankruptcies continue to fall

Filings in first half of 2013 down 14% from a year ago

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The first half of 2013 saw another dramatic decline -- 14 percent --  in the number of consumer bankruptcy filings over the same period in 2012.

The 50 states and District of Columbia saw fewer than 539,000 filed thus far in 2013. At the midpoint of last year, 627,000 consumer bankruptcy were filed, according to statistics from Epiq Systems, which compiles data from federal bankruptcy court reports.

Filings have recorded steady declines since reaching nearly 1.55 million in 2010, but experts are split on whether a dammed-up demand for bankruptcy is about to be released. October marks the eighth anniversary of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005. The law includes a provision preventing people from filing for Chapter 7 bankruptcy for eight years after they've already filed.

"You're going to see an echo effect because so many people have been unable to file," says David Leibowitz, founder of Lakelaw in Chicago and a Chapter 7 bankruptcy trustee for the Northern District of Illinois. He predicts the number of filings will jump about 5 percent in the final quarter of the year.      

Edward Boltz, president of the National Association of Consumer Bankruptcy Attorneys and a bankruptcy attorney in Durham, N.C., isn't convinced. "Very few people plan a bankruptcy. Instead, it's still usually triggered by job loss, divorce or medical problems.  Those don't occur based on a calendar." 

Filings fall
In most states, the number of new filings has plunged. Tennessee continues to lead the list in terms of per-capita filings, with 6.69 filings per 1,000 residents. Illinois, Georgia, Alabama and Nevada all recorded more than five filings per 1,000 residents.

In terms of total number of filings, California again has recorded the greatest number of filings, with nearly 72,000 filings this year, compared to nearly 99,000 for the first half of 2012. Florida, which still ranks second, experienced a more modest decline, from nearly 42,000 in the first six months of 2012 to more than 38,000 so far this year. Illinois, which ranks third, was nearly flat. Almost 34,900 cases have been filed this year in Illinois, down by about 700 from last year.

Illinois' situation stands in contrast to other major states, and Leibowitz attributes the bankruptcy issues in part to the state's economic issues. Illinois has one of the highest foreclosure rates in the country, and the foreclosure process drags on for nearly two years, according to RealtyTrac.

The state also has one of the highest unemployment rates in the country, though it is gradually improving. In May, Illinois' unemployment rate stood at 9.1 percent, compared to 7.6 percent for the nation as a whole. As people slowly return to work, they then may file for bankruptcy. "If you are too poor, you can't go broke. There's nothing anyone can do to hurt you" because you have no assets to seize or wages to garnish, Leibowitz says.

While the nation's bankruptcy rate is falling, consumers' use of credit is on the rise, which typically indicates growing consumer confidence.

Revolving credit -- comprised mainly of credit card debt -- soared to $856.5 billion in May, compared to $849.9 billion the previous month, according to the Federal Reserve. It had bottomed out at $834 billion in April 2011.

May's total is still a far cry from 2007 and 2008, when consumers had more than $1 trillion in revolving debt.

When job losses hit, the housing bubble burst and consumer credit tightened, bankruptcies soared, climbing to almost 1.55 million in 2010. They've been in decline ever since.

Filings reached their peak in 2005, totaling almost 2 million. That preceded the introduction of bankruptcy reform laws. With the eight-year moratorium on new Chapter 7 filings, higher filing fees, a means test for eligibility and a required consumer credit counseling program, consumers rushed to file before the new law took effect.

Juan Rodriguez contributed to this report.

See related: 14 key factors when considering bankruptcy

Published: July 23, 2013


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