Bankruptcy filings are at their lowest in 10 years, but not for the reasons you might think
Bankruptcy courts are quiet places these days, at least compared to previous years.
Business and consumer bankruptcy rates are at their lowest in about a decade, according to a new report from Supreme Court Chief Justice John Roberts.
Judicial statistics for September 2010 show that at the height of the Great Recession, nearly 1.6 million bankruptcy claims were filed, with 1.53 million consumer cases making up the vast majority of the case.
Eight years later, the number of new cases has been cut by more than half. As of September 2018, more than 770,000 cases were filed by bankrupt businesses and individuals seeking to restore their finances through court-ordered debt forgiveness and repayment plans. Consumers accounted for 97% of the cases.
People may not go bankrupt because it costs too much and they may not have enough assets to protect.
In fact, bankruptcy claims haven’t been this low since 2007, Roberts said Monday in his annual Federal Courts Summary.
Yet the relative silence in bankruptcy court rooms, at least when it comes to consumer affairs, may not be all golden.
People may not file for bankruptcy because it’s too expensive to do so, and they might have too few assets to protect, bankruptcy experts told MarketWatch. In addition, some added that other cases could be around the corner.
“People can’t afford to pay lawyers to file for bankruptcy,” Chicago attorney Lorraine Greenberg said. She cited a legislative overhaul from 2005. The Bankruptcy Abuse Prevention and Consumer Protection Act has created more work for lawyers, who have been forced to raise their own rates for their clients, t she declared.
Bankruptcies can be expensive
Greenberg said she was charging $ 1,500 up front to file a Chapter 7 case, in which debtors sell their assets and can have some debts written off. This price does not include legal costs and costs that debtors must also incur, she said. Those prices can hover around $ 350, she noted.
She has about a meter of storage space for documents from people willing to file bankruptcy once they get the money to hire her. “I’ll never see him. … They have no disposable income to pay their lawyer, ”she said.
“Bankruptcy follows recovery. When people have something to protect, they go bankrupt.
A 2017 study estimated the average attorney fees in Chapter 7 cases at around $ 1,200, paid in advance. Debtors typically paid around $ 3,200 for lawyers to file Chapter 13 cases; these costs were paid over time as part of the resolution of the case. (Chapter 13 allows payment plans confirmed by the court to creditors.)
The flip side of the findings was that older Americans are filing for bankruptcy at disproportionate rates, struggling with too low incomes and too high health costs.
But Ricardo Kilpatrick, a Michigan-based attorney representing creditors in consumer bankruptcy cases, said there were a number of reasons behind the drop in petitions, including attorney fees. “Bankruptcy follows recovery,” he said. When people have something to protect, they file for bankruptcy, ”he said.
Yet Kilpatrick, former president of the American Bankruptcy Institute, said consumer reports could increase as more people return to the workforce and take on more credit.
Some bankruptcy lawyers say December has been busy
A strong jobs report said Friday that the US economy gained 312,000 new jobs in December. The unemployment rate climbed to 3.9% from a low of 3.7% in 49 years. The slight increase might actually be a good thing, indicating that people think it’s easier to get a job.
Kilpatrick recalled conversations last month with four separate debtor attorneys. Three of the four told him it was the busiest December they’ve had in the past six years, Kilpatrick said.
Chicago attorney Lorraine Greenberg said the Affordable Care Act could help people avoid bankruptcy due to unpaid medical bills.
The reasons for the fall might not all be bleak. Greenberg said there may be a link to increased health care coverage under the Affordable Care Act. “Fewer people need bankruptcy to wipe out medical bills,” she said.
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Another explanation: Recession-era federal mortgage programs that allowed distressed homeowners to make deals with lenders have also helped people avoid filing for bankruptcy, lawyers told MarketWatch. Creditors “have become much more accommodating in doing extrajudicial training,” Kilpatrick said.
Roberts’ recent report said that deposits “increased steadily” from 2007 to 2010, “but have declined in each of the past eight years.”
This drop in bankruptcy claims largely coincides with a historic nine-year bull run on Wall Street – a streak that could come to an end amid concerns about an economic slowdown.
The drop in bankruptcy claims largely coincides with a historic nine-year bull run on Wall Street, a streak that may soon end.
But bankruptcy rates do not necessarily reflect the overall economic health of the country. “It really didn’t exactly follow the economy,” said Henry Sommer, former president of the National Association of Consumer Bankruptcy Attorneys. Deposits were high in the late 1990s when the economy was buzzing and consumer credit was easy, he said.
Bankruptcies seem to follow Americans’ debt-to-income ratio more closely, according to Sommer. The figure shows how much debt a household is, by dividing its monthly debt payments by its income. Aggregate household debt ratios rose in the early 2000s, then began to decline in 2008, according to data from the Federal Reserve.
Despite record levels of credit card debt, households are still in a better position to repay their debts than they were during the recession.
The $ 1.5 trillion gorilla
Another possible factor in the decline of bankruptcies is the American student loan crisis. Americans now owe $ 1.5 trillion in student debt, and the repayment efforts can be overwhelming for some.
But borrowers have a hard time proving legally that repayments are “undue hardship,” which means filing for bankruptcy wouldn’t help them much.
“In practice, it is virtually non-dischargeable in all cases,” Sommer said of student debt. The courts will not write off “non-dischargeable” debts.
And cash-strapped student loan borrowers may not be forced into bankruptcy simply because they don’t have enough money to accumulate other forms of debt, such as credit card debt. Sommer said.
In fact, consumers aged 18 to 34 have experienced fewer bankruptcies over the past decade per 1,000 people, compared to those aged 65 and older, Foohey research has found. “These are people who are struggling with student loans,” she said, making it difficult for them to build more assets.