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Sunday, May 20th 2012

Bankruptcy filings fall in first quarter of 2011

Economy improves, and there's less debt left to file over

By Susan Ladika

The new year started with bankruptcy filings falling nearly 6 percent compared to the first quarter of 2010, but experts are split on whether it reflects the beginnings of a real economic turnaround, or if it's just a blip on the radar screen.

"The economy generally is improving so much, but we're by no means out of the woods," says David Leibowitz, a consumer bankruptcy attorney in Illinois and Wisconsin and bankruptcy trustee in Illinois.

He cites the dip in unemployment, uptick in consumer spending and amount of government stimulus money pumped into the economy for fueling the decline in bankruptcy filings -- along with the fact that nearly 1.55 million people filed for bankruptcy last year alone. In addition, credit card debt has also fallen sharply during the recession, so there's less debt over which to file for bankruptcy.

2011 bankruptcy filings

Bankruptcy filings dropped a steep 12 percent in 2011, and while some experts attribute it to more cautious consumer spending and a decline in credit card debt, others say there we're just running out of people who can who can benefit from filing.

Fewer than 1.37 million bankruptcy filings were recorded in 2011 for the 50 states and District of Columbia, according to data from Epiq Systems, compared to almost 1.55 million the previous year.

 "It mimics consumer spending," says Howard Dvorkin, founder of the nonprofit Consolidated Credit Counseling Services Inc. "The whole debt world has been turned on its head over the last 18 months."

The chart below summarizes Chapter 7 and Chapter 13 bankruptcies by state and by jurisdiction, through the end of 2011

Credit card companies curtailed their solicitations, and it was common to see issuers retract consumers' credit cards or cut their limits, says Rick Bialobrzeski, director of business development and communications at the nonprofit GreenPath Debt Solutions.  That, combined with the unsettled economy, forced many consumers to curb their spending.        

For 2011, Utah was the only state that saw an increase in bankruptcy filings, climbing a modest 1 percent.

Meanwhile, states with sky-high bankruptcy rates in previous years saw healthy declines in new filings. In Nevada, they fell 19 percent from 2010 to 2011; in Florida they dropped 16 percent; and California saw an 8 percent decline.

But the drop in filings may be also be influenced by the fact there are only so many people that can benefit from bankruptcy.

Bankruptcy was designed as a way to give "well-meaning people a fresh start," says David Epstein, a law professor at the University of Richmond in Virginia and a visiting scholar at the American Bankruptcy Institute. "In today's economy, if you don't have a job, bankruptcy doesn't really give you a fresh start."

Although the unemployment rate peaked at 10.6 in January 2010, and was down to 8.5 percent in December, that's still a far cry from the pre-recession 2008 rate of about 5 percent.

Recovery also has been hampered by the length of time people have been unemployed. In December, almost 5.6 million workers had been unemployed for at least 27 weeks, according to the Bureau of Labor Statistics.

Often these consumers have tapped out their resources, "so there's nothing to take" and no point in filing for bankruptcy, says David Leibowitz, a bankruptcy attorney and founder of Lakelaw in Waukegan, Ill.

Nevada leads per-capita filings
Nevada still leads the country with the most per-capita bankruptcy filings, chalking up nearly 9 for every 1,000 residents. But that's down from 11.1 for every 1,000 residents in 2010.

Georgia and Tennessee were second and third, respectively, with more than 7 filings for every 1,000 residents.

Cumulatively, California still had the most filings, with more than 234,000 in 2011, yet that's down more than 20,000 from the previous year.

Florida still places second, with more than 92,000 filings, down from more than 110,000 in 2010. Georgia and Illinois were the only other states with more than 70,000 filings in 2011.

Card debt resurging
Credit card debt and bankruptcies have also moved in opposite directions since the recession. As the recession hit 2008 and a bad economy lingered in 2009 and 2010, bankruptcies rose. Credit card debt fell sharply during that same period, from a peak of $975.5 billion in 2008 down to $800.5 billion at the end of 2010.

Now the two have both reversed course. Bankruptcy filings fell by about 182,000 in 2011 compared to 2010. Credit card debt, meanwhile, has started to pick up again: The Federal Reserve's report on consumer credit shows credit card spending jumped almost 9 percent in November, to a total of $798.3 billion.

Student loans also are on the rise -- they now surpass credit card debt, reaching $845 billion in the second quarter of 2011, the Federal Reserve Bank of New York reports. With few exceptions, "people burdened by educational loans don't get any help from bankruptcy," Epstein says. Student loans are difficult to discharge in bankruptcy.

The decline in filings, Epstein says, doesn't necessarily signal that the economy is making a dramatic turnaround. Instead, it may stem from "a growing realization that bankruptcy doesn't fix my problems" if someone is unemployed, faces a catastrophic illness or is burdened by student loans.

And many of those who can benefit from filing for bankruptcy have already done so, Dvorkin says.

Bankruptcy filings surged in 2005 to about 2 million, driven by the introduction of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005. Under the law, higher filing fees, a means test for eligibility, required counseling programs and an eight-year moratorium before a person can file again were implemented.

The changes prompted many consumers to file before the law took effect, and that filing boom, combined with the time it took attorneys to adjust to the new act, pushed filings down to 617,000 in 2006. By 2007, filings had passed 850,000, and they continued to soar -- until 2011.  

2012 outlook cloudy
The experts are torn as to what filings will look like in 2012.

On the upside, the unemployment rate has fallen and consumer confidence is on the rise. That has been accompanied by an increase in the number of credit card solicitations and the volume of credit card borrowing.

Holiday spending also has surged. Although final figures haven't been released, the National Retail Federation predicted sales would be up 3.8 percent over last year, reaching $469.1 billion. Online sales were up 15 percent, to $37.2 billion, the analytics firm comScore reported.

Bialobrzeski isn't sure if the spending increase means people are more confident about their personal financial situations, so they're spending more, or if they've resumed spending beyond their means.

Another question mark hanging over the horizon is foreclosures. Activity bogged down in late 2010 with the controversy over robo-signing, allowing many people to remain in their homes.

Bialobrzeski says that in the past some people would file for bankruptcy in an attempt to keep their homes. But he's not sure how big a motivator that is today, with so many borrowers underwater on their mortgages. "We're in uncharted waters here."

On the flip side, Beth Mason, bankruptcy outreach coordinator for InCharge Debt Solutions, says the decline in filings came as a surprise because the number of calls to the nonprofit consumer counseling service from consumers seeking a way out of their financial morass has continued to rise.  

The first quarter of 2011 saw slightly more than 355,000 bankruptcy filings in the 50 states and District of Columbia, compared to more than 376,000 the year before, according to federal bankruptcy data compiled by Epiq Systems Inc.

In terms of raw numbers, California, which had the largest number of bankruptcy filings for the first quarter, at nearly 63,000, was one of just a handful of states that saw its number of filings rise.

The other top states for filers -- Florida, Illinois, Georgia and Michigan -- all saw their numbers decline.

Nevada still leads in filings
Although Nevada continued to lead the ranks with the largest number of filings per capita, those figures were down dramatically, from 10.32 per 1,000 people in the first quarter of 2010, to 8.94 per 1,000 this year.

Rounding out the top five, with between 6.5 and 7.5 filings per 1,000 residents, were Tennessee, Georgia, California and Alabama. California had the dubious distinction of replacing Michigan in the top five.

Leibowitz says some experts believe filings in the first quarter of the year tend to be higher than other quarters. People may hold off filing so they don't ruin the holidays, or they wait to receive their income tax refund so they can pay filing fees.

But Mason fears rising gasoline prices will put a crimp in consumers' budgets, forcing more into bankruptcy court. As of April 18, 2011, gas prices averaged $3.84 nationwide, according to the U.S. Energy Information Administration, up nearly $1 from the year before. The soaring price of fuel also drives up the cost of other goods, like food.

Mason says some consumers might opt to skip credit card payments in order to "eat and get to work."

While no one can predict how the bankruptcy filing numbers will shape up for the year, the 1.55 million filings in 2010 were still a far cry from the peak of 2005, when they reached about 2 million before the introduction of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005.

With the introduction of the law came higher filing fees, a means test for eligibility, counseling programs and an eight-year moratorium before a person can file again.

Consumers rushed to file for bankruptcy before the law took effect, and that boom in filings, along with the time it took for attorneys to adjust to the new act, pushed filings down to 617,000 in 2006. Since that time, filings had been climbing steadily, until 2011.

See related: Personal bankruptcies rose 8 percent in 2010, What to say when you can't pay

Published: April 19, 2011

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