Decline in Bankruptcy Filings Not Necessarily a Positive Sign
American Bankruptcy Institute statistics show that personal bankruptcy filings declined by 10 percent for the first nine months of 2011, as compared to the number of filings for the same time period of 2010. Bankruptcy courts saw over 1.5 million bankruptcy filings in 2010 – the highest number since Congress passed the 2005 Bankruptcy Act making it harder for people to file bankruptcy. While the drop in the number of people filing bankruptcy may seem like an indication that the economy may finally be starting to recover, experts suggest that there are several other explanations for the dip in bankruptcy filings that may not paint a portrait of a brighter economic future.
More People in Worse Economic Condition
One of the biggest motivators for people to file bankruptcy is to try to protect some of their assets, such as a house, from creditors when they fall behind in their bill payments. Bankruptcy can stop foreclosure, repossession and wage garnishment. However, when people are unemployed and have no equity in their homes, there is no motivation for them to file bankruptcy. They have no assets to protect anymore and are “judgment-proof” – even if creditors tried to collect from them, there is nothing to take.
Many experts suggest that more people are in such bad financial shape that it is not even worth it for them to file bankruptcy; they have nothing to try to save.
Time Limits on Filing Bankruptcy
Another possible reason that the number of bankruptcy filings has dropped is that there are limits on how often a person may file bankruptcy. A person may only file Chapter 7 bankruptcy once every eight years. Ten million people have already filed bankruptcy within the last eight years, meaning that many may still be in financial trouble but unable to file bankruptcy again.
Creditor Cooperation
More frequently creditors are willing to work with people to arrange payment plans, which could contribute to the decline in bankruptcy filings. Many have been able to negotiate with creditors to get reduced monthly payments or reduced interest rates just so that creditors see some kind of payment, rather than having people default entirely on their debts. People are still having trouble paying their bills, but creditors are not rushing to get judgments, lessening the pressure to file bankruptcy.
Backlog of Foreclosures
The sheer number of homes facing foreclosure may be helping some people delay filing bankruptcy. Some homeowners are able to forego paying their mortgages for as long as 18 to 24 months before the lender forecloses on their properties.
Also, lenders are more willing to agree to short sales to reduce the number of foreclosed properties that they have to sell. This can also help a person’s financial position enough to stave off bankruptcy filing.
Fewer bankruptcy filings may seem like news that things are looking up in the economy. However, analysts argue that other more reliable economic indicators suggest that the economy shows few signs of recovery. If you are in financial distress because of these hard economic times, contact an attorney who can discuss your situation with you and advise you of your options.