Local and national bankruptcies trended downward in 2011 compared to 2010, and averages are still below levels from 2005, when reforms were implemented to stem the frequency of bankruptcy liquidations and increase repayment plans.
Filings in 2011 for the U.S. Bankruptcy Court’s Western District of Missouri were down 15 percent overall, and in the district’s Southern Division, which includes Springfield, they fell 13.7 percent from the previous year.
According to USCourts.gov
, in the 12-month period ending Sept. 30, 2011, filings across the nation totaled 1.47 million, down 8 percent from 1.6 million in the previous 12-month period.
Ken Reynolds, a bankruptcy attorney with Reynolds, Gold & Grosser PC, said the downward trend could be due to a desire among people to save money.
“I think it’s consistent with the idea of people reining in their spending,” Reynolds said, adding that the firm’s bankruptcy business has roughly paralleled the national decline rate. “I think they’re trying to hold down their debt and may be concerned about their credit scores.”
Attorney Angela Acree, owner of Acree Law Firm LLC, dba The Bankruptcy Clinic, said another factor may be that the costs associated with bankruptcy are too high.
“I think there is such a thing as being too broke to file bankruptcy,” Acree said. “It’s pretty expensive, relatively speaking, when you’re looking at it costing somewhere between $1,200 and $3,200 to file a bankruptcy. For these folks that are worried about their paychecks and feeding their kids, I think the thing they are least worried about is their credit.”
Based on recent data from the Federal Reserve Bank of New York, it appears some consumers are trying to pay down their debts.
Aggregate consumer debt fell roughly $60 billion to $11.66 trillion in the third quarter of 2011, according to the reserve bank’s latest Quarterly Report on Household Debt and Credit. The report, which was released Nov. 28, also found mortgage balances on consumer credit reports fell 1.3 percent in the third quarter to $114 billion.
Between the end of September 2004 and September 2005 – just prior to bankruptcy reforms through the Bankruptcy Abuse Prevention and Consumer Protection Act that took effect in October 2005, there were 1.78 million bankruptcies filed in the U.S.
That’s 300,000 more than the number of national filings for the year ended Sept. 30, 2011.
In the Western District’s Southern Division, total bankruptcies were 42 percent below 2005 levels.
Though experts have said reforms were designed to transition Chapter 7 liquidations into Chapter 13 repayment plans, Reynolds doesn’t believe that is what has happened.
“I don’t think the law had its intended effect,” Reynolds said. “The year following the bankruptcy change in 2005, the decline, I think, was a result of people being afraid to file after the new law came into effect. But each year after that, you see a consistent rise in the bankruptcy filings. … I think there has been a little push to people filing Chapter 13, but I don’t think that number has been very significant.”
In the Southern Division, Chapter 13 filings are up 44.2 percent compared to 2005, but the increase doesn’t offset the overall decline.
According to the American Bankruptcy Institute, a person filing for Chapter 13 bankruptcy is agreeing to pay back creditors with disposable income over time, usually a three- to five-year period. Chapter 7, which is most common, is a liquidation of assets in order to discharge debt. Chapter 11, another common filing, is often utilized by business debtors, but it is also an option for individuals with substantial debt and assets.
One possible reason for overall filing declines since 2005 is that there are more demands placed on filers.
“There are more documents that have to be submitted to the bankruptcy court,” Reynolds said. “The biggest thing that changed as far as additional paperwork for the bankruptcy court is what they call the means test. The means test is a mathematical calculation that the bankruptcy court uses to determine whether a person should (file) a Chapter 7 or Chapter 13, and it also determines disposable income.”
The disposable income figure in a Chapter 13 case sets a presumed amount of money that would be used to repay creditors. Filers also have to complete two credit counseling courses, Reynolds said, and provide documentation on proof of income.
David Wieland, a partner in Wieland & Condry LLC who represents creditors in bankruptcy cases, said the reforms have curbed some abuses.
“In my opinion, if you are making a lot of money, you ought to make a good effort to pay your creditors, and a lot of people weren’t doing that,” Wieland said.
Rick Gustafson, a partner in the firm that operates as Macey Bankruptcy Law in Springfield, said increased paperwork requirements have contributed to the recent downward trend in filings.
“People, in general, are not good record keepers,” said Gustafson, who is based in Chicago. “And whenever there is a law change that requires someone to be a better record keeper, that creates burdens.”
Reynolds said filing charges and court fees – which range from $1,300 to $1,500 for Chapter 7 and $1,800 to $3,300 for Chapter 13 – are up roughly 20 percent at his firm compared to pre-reform levels, though he said that’s mostly due to the additional time attorneys have to spend with their clients.
Gustafson and Acree, however, agree that as the economy turns around, filings are likely to rise as people feel more free to spend and take on higher levels of debt.
Acree said, too, that as the economy improves, more people may turn to bankruptcy to address credit issues they’ve encountered during the recession.
“Up until now, they’ve just been in survival mode,” said Acree, whose firm’s staff has dropped to two from five in the last six years.[[In-content Ad]]