Bankruptcies fall again in third quarter of 2012

Filings down 14% in first nine months of the year

By Susan Ladika

Like a boat that survived a tsunami, bankruptcy filings that had rocked up and down violently over the past few years are finally settling into a more-normal-looking pattern.

With the economy plodding along toward recovery and credit still tight, consumer bankruptcy filings fell to abouit 913,000 in the 50 states and District of Columbia in the third quarter of 2012, according to figures from Epiq Systems. That's down 14 percent compared to the first nine months of last year, when filings reached more than 1.06 million.

Total bankruptcy filings for 2011 are also down from 2010. Last year there were less than 1.37 million bankruptcy filings. In 2010, they'd soared to almost 1.55 million -- the highest number since 2005, when a pending bankruptcy law changes drove filings to record levels, before sending them plummeting. The huge up-and-down wave was followed by a second pulse: a quick rise and now a less-violent drift back downward.

BANKRUPTCY FILINGS, STATE BY STATE
An animated view of bankruptcies over time, state by state

While the number of consumer bankruptcy filings has fallen since 2010, experts doubt the slide will continue indefinitely as a normal ebb and flow takes hold.

As the economy continues to pick up steam and creditors loosen their lending standards, "people will start to get more adventurous with their money," predicts Ted Connolly, a Boston bankruptcy attorney. "It will start the cycle again."

Why today's decline
Tied to the current decline in bankruptcy filings is a decline in consumer borrowing -- both lender-imposed and self-imposed.

Consumers took on less debt, "both because of tightening underwriting standards and because debtors were being more cautious because of lack of confidence about the economy," says Jean Braucher, a national bankruptcy expert who teaches law at the University of Arizona.

For the moment, according to another report from a federal agency, consumers are staying on the right track. In the "Quarterly Report on Household Debt and Credit," the Federal Reserve Bank of New York found the total indebtedness of U.S. households fell to $11.38 trillion, down $53 billion from the first quarter of the year. And household debt is down $1.3 trillion since it peaked in the third quarter of 2008.

Credit cards are one of the bright spots. In the second quarter of 2012, balances totaled $672 billion. That compares to the peak of $866 billion in the fourth quarter of 2008, according to the report.

Prudent use of credit by consumers is only part of the reason. Credit card companies cut limits or canceled cards, while consumers scaled back their credit card usage. "People haven't been given the ability to run up the kind of debt that pushed them to bankruptcy," Connolly says.

When the economy boomed and credit cards were readily available, consumers "were given so much rope, millions of people were just hanging themselves," he says.

Like credit cards, mortgages and home equity lines of credit have also declined, according to the Federal Reserve Bank of New York report. Total mortgage balances stood at a little more than $8 trillion for the second quarter of the year.

Foreclosures also slid. About 256,000 homeowners had new foreclosures included in their credit reports in the second quarter of the year, down 12 percent from the first quarter. Since their peak in 2009, foreclosures have tumbled by 55 percent.

If foreclosure activity picks up again, it could be combined with an upsurge in bankruptcy filings, says Bethany Mason, outreach programs director for the nonprofit InCharge Debt Solutions. "A lot of people are still in their homes, just waiting for the notice.

"Once they get the foreclosure notice, that's when they're going to file," she predicts, because filing for bankruptcy stops all creditors.

Tennesseeans most likely to file
When you look at bankruptcies at a state level, California has continued to lead in the raw number of filings, at nearly 142,000. It's followed by Florida, with more than 61,000 filings.

But those two states, which once ranked high in filings per capita, have seen steep declines. California is now ninth in filings per capita, while Florida is 15th.

Both states have contended with a surge of underwater mortgages and foreclosures. "That's not an environment in which consumers take on more debt -- either they voluntarily cut back or they have no choice because they can't get access to new credit," Braucher says.

Tennessee has now unseated Nevada with the most bankruptcy filings per capita. Tennessee has seen nearly seven filings for every 1,000 people so far this year. Nevada ranks a close second, with 6.84 filings per 1,000 residents. Georgia is third, with about 6.5 filings per 1,000 people.

Because bankruptcy filings are cyclical, Braucher expects the numbers to decline for a couple more years before rebounding again.

Going bust with less
Those who filed for bankruptcy in 2011 had fewer assets and fewer liabilities, according to a report by the Administrative Office of the United States Courts.

Of the more than 1.3 million who filed for bankruptcy last year, their total assets were $221 billion, down 23 percent from 2010. Total liabilities were $280 billion, a 25 percent decline compared to 2010.

The median average monthly income for those filing for bankruptcy was $2,781 last year, while their median average monthly expenses were $2,837, the courts report found.

At their apex in 2005, bankruptcy filings reached about 2 million, driven by the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005. The law introduced 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 for bankruptcy before the law took effect. The jump in filings, along with the time it took attorneys to adjust to the new act, decreased filings to 617,000 in 2006. The number of filings began to rise again in 2007 and continued on that route through 2010.

See related: State-by-state bankruptcy statistics, 2005-2012

Published: October 23, 2012

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