Housing bubble states led the pack in bankruptcies, with California and Florida having the most people file. Hawaii had the largest percentage increase and Nevada the most per capita
Personal bankruptcy filings slowed their precipitous climb, rising 8 percent in 2010. While it’s a far cry from the 32 percent jump from 2008 to 2009, many experts believe filings are far from reaching level ground.
“We have a situation that is nowhere near resolved right now,” given the continued high unemployment rate and the millions who owe far more on their homes than their properties are worth, says David Jones, president of the Association of Independent Consumer Credit Counseling Agencies.
|THE RISE, FALL AND RISE|
OF BANKRUPTCY FILINGS
|A 2005 federal law restricting bankruptcies had a large immediate impact, pushing filings way down after its passage. But despite it making filing more expensive and difficult, bankruptcies are nearly back to the level they were before the law’s passage. See an interactive state-by-state U.S. bankruptcy time line.|
On top of that, Jones worries about the reports of a robust 2010 holiday shopping season. “That’s going to hit home this month and next,” Jones says, fearing it will fuel bankruptcy filings in the first half of 2011.
For 2010, bankruptcy filings hit almost 1.55 million in the 50 states and Washington, D.C., according to data from Epiq Systems Inc. That compares to nearly 1.44 million filings the previous year.
Determining which state had the worst year all depends on the way the numbers are sliced and diced.
Big state = big bankruptcy numbers
In terms of raw numbers, the most filings were recorded in some of the most populous states, including California, Florida and Illinois. California chalked up the highest number of filings, more than 255,000, while Florida came in second, with more than 110,000 filings. These two biggies were hard hit by the housing bubble and have unemployment rates far outpacing the national average.
On the other hand, it was primarily smaller states that recorded the biggest percentage increase in total cases. Four states saw filings soar by more than 20 percent. Hawaii topped the list, with a 28 percent increase, followed by Utah and California at 24 percent, and Arizona at 22 percent. Most are states with high foreclosure rates.
Yet a dozen states saw the number of filings decline from 2009 to 2010.
When it comes to per-capita filings, Nevada continues to be at the head of the pack, with 11.1 filings for every 1,000 people. In 2009, Nevada saw 11.2 filings for every 1,000 people. Last year, Nevada was followed by Georgia, Tennessee, Alabama and Indiana, which all had more than seven filings per 1,000 people.
We have a situation that is nowhere near resolved right now.
|— David Jones|
High, but not record levels
Despite the rise in filings from 2009 to 2010, they still don’t rival the peak of 2005, when they totaled about 2 million, with a huge spike coming just before October of that year, when a federal bankruptcy reform law went into effect. The Bankruptcy Abuse Prevention and Consumer Protection Act made filing bankruptcy tougher by requiring higher filing fees, a means test for eligibility, counseling programs and an eight-year moratorium before a person can file again.
The boom in filings by people wanting to beat the law, along with the time it took attorneys to adjust to the new act, pushed filings down to 617,000 in 2006. By 2007, filings had surpassed 850,000, and they have continued to soar ever since.
Things don’t seem to be turning around. Ted Connolly, a bankruptcy attorney with Edwards, Angell, Palmer & Dodge in Boston, and co-author of the book “The Road Out of Debt: Bankruptcy and Other Solutions to Your Financial Problems,” says “without a big pickup in job growth, I don’t see a difference” in filings for 2011.
Many people who are out of work live on their credit cards for about a year before filing for bankruptcy, Connolly says.
The unemployment rate started its steep climb in mid-2008 and topped 10 percent in October 2009, according to the U.S. Bureau of Labor Statistics. And by December 2010, the average length of unemployment was 34 weeks.Even when people can find work, it’s often at a much lower salary level than the job they lost, Jones says. Because of “supply and demand, that issue will stay that way for the next three to four years,” he predicts.
Along with the slow job growth prognosis, consumers have been battered by falling property values. Connolly says people used to be able to tap into the equity in their homes when they ran into tough times, but now millions of homeowners are underwater on their mortgages, and foreclosures are still going strong.
Despite the economic struggles, Neil Ellington, executive vice president at CESI Debt Solutions, says his organization has seen a 17 percent reduction from 2009 to 2010 in the number of people seeking pre-bankruptcy counseling.
He attributes the decline to the “deluge of debt settlement advertisements in the marketplace.”
Bankruptcy losing its stigma?
Ellington also thinks people have become more accepting of filing for bankruptcy, after watching corporations file for bankruptcy and then continue on with their operations.
“I remember when bankruptcy used to be a character issue. Then it became a financial issue,” with people more willing to walk away from their financial obligations, Ellington says.
One brake on bankruptcy filings may be the cost. While consumers can file under Chapter 7 or Chapter 13 for less than $300, many people opt for an attorney “for the extra assurance that things will go well,” Connolly says, and that can cost $1,000 or $1,500.
In his blog, Credit Slips, Robert Lawless, a law professor at the University of Illinois at Urbana-Champaign, writes that the level of consumer debt impacts filings. “The long-term growth in U.S. consumer bankruptcies closely tracks the long-term growth in U.S. consumer debt. When the financial crisis hit, consumer credit dried up, and outstanding consumer debt experienced unprecedented declines. There are fewer reasons to file bankruptcy today because there was less borrowing two to three years ago.”
Jones, however, thinks filings will continue their climb this year, reaching about 1.6 million. “We see consumers who have just been hanging on by the skin of their teeth going over the edge.”