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Credit diet shrinks bankruptcy rolls in second quarter of 2012

Tighter credit in years past means fewer need debts discharged today

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The tightening of consumer credit during the economic downturn may be paying off now, as the number of consumer bankruptcy filings plunged by 14 percent during the first half of the year, continuing the steep decline that began last year.

For the first six months of the year, there were nearly 627,000 bankruptcy filings in the 50 states and District of Columbia, compared to almost 725,000 filings in the same time period in 2011, according to figures from Epiq Systems. For state-by-state details, see "State-by-state bankruptcy filing statistics, 2005-2012."

"It all has to do with the credit supply going back two to four years," says Jean Braucher, a law professor at the University of Arizona, as well as vice president of the National Consumer Bankruptcy Rights Center and a member of the National Association of Consumer Bankruptcy Attorneys' board.

Bankruptcy filings decrease, credit crunch pays off

During the depths of the recession, new credit was a challenge for many consumers to obtain and companies cut credit card limits and canceled cards.  

Credit use curbed
As a result, some people curbed their spending out of economic necessity, while others did so by choice, Braucher says.

That meant a substantial drop in consumers' use of revolving credit. Outstanding revolving debt, which topped $1 trillion in 2008, bottomed out at $857 billion in 2010. It crept up to $870 billion in May 2012, which is still 13 percent lower than it was at its peak, according to the Federal Reserve.

On the other hand, outstanding nonrevolving debt has climbed, rising from about $1.54 trillion in 2008 to $1.7 trillion in May.

While total consumer debt exceeded $2.5 trillion both years, revolving debt comprised almost 40 percent of total debt in 2008. In May, it was down to about one-third.

"People are keeping debt levels down. That's what we've dreamed about for years," says Bruce McClary, spokesman for ClearPoint Credit Counseling Solutions.  

Lingering concerns about the economy "leave people a bit uneasy," McClary says. "As long as unemployment stays as high as it is, it's going to be on everyone's mind when they get credit card offers."

Credit card companies had been peppering consumers with credit card solicitations again. And some banks are beginning to increase their marketing of unsecured personal loans and lines of credit.

People are keeping debt levels down. That's what we've dreamed about for years.

-- Bruce McClary
ClearPoint Credit Counseling Solutions

The increased access to credit might help stave off bankruptcy for some, Braucher says. "People who might be on the edge can now get more credit. That means they can ride things out longer."

Card offers down
However, a study by Mintel Comperemedia, which tracks direct marketing efforts, found that credit card offers sent to households fell to 260 million in April, the lowest level in more than two years. In June 2011, nearly 500 million offers were sent. 

"Issuers have adopted a more cautious approach due to an uncertain economic environment. The latest downturn likely reflects a pause in activity rather than signifying a permanent reduction in direct mail," Andrew Davidson, senior vice president, said in a release.

He predicted volume will again rise as the economy improves and as credit card companies develop new ways to entice consumers to sign up for new cards.

For the time being, with continued high unemployment, "People are worried. It contributes to the lower amounts of debt," Braucher says.

Prior to the recession, many homeowners used their homes as banks, borrowing against their equity to make purchases and piling up mountains of credit card debt. When the housing bubble burst and unemployment soared, a raft of bankruptcy filings followed in their wake.

In 2010, bankruptcy filings reached nearly 1.55 million, up 8 percent from the previous year. In 2011, they dipped to less than 1.37 million.

All 50 states see fewer filings
So far this year, all states and the District of Columbia have seen a decline in the number of filings as compared to last year. But in South Carolina, they're down a paltry 1 percent, while in the District of Columbia they're down just 3 percent.

If you're unemployed, it's usually not a good time to file for   bankruptcy.

-- Jean Braucher
University of Arizona law professor

In contrast, other states, including those which had huge numbers of filings in recent years, have experienced steep declines. In Nevada, they fell 27 percent compared to 2011, while California saw a 22 percent drop.

Nevada continues to lead the nation with the highest number of filings per capita, at 7.06 for every 1,000 residents, followed closely by Tennessee, with 6.99 filings per 1,000 residents. Georgia and Utah both had more than six filings per 1,000 people.

As could be expected, big states saw the greatest number of filings. California ranked first, with nearly 100,000 filings. Florida had almost 42,000 filings, while Illinois and Georgia both exceeded 30,000.

But even the drop in filings doesn't mean everything is rosy. Although the unemployment rate has dipped from 10 percent at its peak in 2009 to 8.2 percent today, many people are returning to work at lower wages than they once received. That means they're likely to have taken on debt based on their previous earnings, Braucher says. If they piled on more debt to weather a spell of unemployment and now are working for less pay, it could lead to more filings down the road.

More employment means more bankruptcy
And an improving employment picture also can prompt more bankruptcy filings. "If you're unemployed, it's usually not a good time to file for bankruptcy," she says. There are no wages to be garnished, and people will continue to borrow if they can, simply to survive.

"People file for bankruptcy when they get back to work," Braucher says. "There's something to protect."

The lingering effects of the housing crisis also can have an impact on filings. "It all depends on whether banks move forward with foreclosures," says William Schiller, chair of the American Bar Association's Consumer Bankruptcy Committee and a founder of Schiller & Knapp in Latham, N.Y.

Right now, many people aren't filing for bankruptcy because foreclosures have stalled, Schiller says.

At their high point in 2005, bankruptcy filings reached about 2 million, driven by the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005. The law resulted in higher filing fees and a means test for eligibility, and required counseling programs and an eight-year moratorium before a person can file again.

Many consumers rushed to file before the law went into effect. The upsurge in filings, along with time it took attorneys to adjust to the new act, pushed filings down to 617,000 in 2006. They began climbing in 2007 and continued on that path through 2010.

Braucher says many experts believe the number of filings will decline for another year or two, then rise again. Typically, if consumer debt increases, bankruptcies will increase two to four years later, and when debt falls, bankruptcies will follow suit.

"Most people think bankruptcy filings will come back, probably in about two years," she says.

See related: After bankruptcy, will anyone ever lend you money again?

Published: July 23, 2012


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