In the current cloudy economy, finance experts and everyday folks are constantly hunting through the news and statistics for silver linings. So it would surely seem a good thing that in the first nine months of this year, personal bankruptcy filings decreased 10% compared to a year earlier, according to the American Bankruptcy Institute -- but experts say hold the applause.
While we might want to take some comfort in the fact that bankruptcies declined from last year -- which had the highest number of filings since 2005 -- truth is, it's not necessarily good news.
"People file bankruptcy because of financial distress," explains David Leibowitz, co-chair of the Consumer Bankruptcy Committee of the ABI. "They are afraid of losing their houses, getting their wages garnished or losing their personal property. If the personal property is exempt, as is often the case for people who have little in the way of assets, if they no longer own their own home as is more and more frequently the case, if the home has no equity, which is very often the case, or if they are unemployed, then people who owe money for credit cards, medical bills and the like are said to be judgment-proof. There's no need for them to file bankruptcy."
Then too, once you file a bankruptcy case, you can't file again under Chapter 7 for eight years. With well over 10 million bankruptcy cases in the past eight years, that's a lot of people who are ineligible to file again, says Leibowitz.
"The fact is, bankruptcy cases continue to be filed at high levels. This is reflective of the very poor economy and does not necessarily reflect a leading economic indicator of better times to come," says Leibowitz.
A Range of Economically Unhealthy Explanations
Something else could be going on too. Creditors are working with consumers more than they ever have in an effort to just collect something. "I see a lot of people at all income levels that are a paying a fixed monthly payment on credit cards which they negotiated better rates with the credit card companies," says Julie Murphy Casserly, president of JMC Wealth Management.
Also, she says, consumers are able to easily walk away from bad home purchases though short sales or foreclosures, either of which can shore up their financial position a lot. And thanks to the sheer volume of home loans in default, homeowners are able to skip paying their mortgages for 18 to 24 months before a bank gets around to kicking them out.
David McClough, assistant professor of economics at Ohio Northern University, certainly sees nothing in the numbers to cheer about either. "Consider, for example, how the financial crisis, recession, housing crisis, and jobless recovery undoubtedly moved forward many bankruptcies that would have been delayed," he says. "In this case, the decline implies that more people declared bankruptcy sooner and thus have struggled with the consequences longer. This is not a good thing."
The 2005 Bankruptcy Act, made it more difficult for individuals to file personal bankruptcy and see a full discharge of their debts. Consequently, many who file will have to pay some of their debts over time. That means filing bankruptcy is no longer the golden parachute it once was.
"This could discourage the greater number of filers," points out Jeffrey Verdon, a tax and estate planning attorney with the Jeffrey M. Verdon Law Group. He has another suspicion: "The extension of unemployment benefits may have had an affect on the number of those who file for personal bankruptcy."
Others suggest the dip may be temporary. "As foreclosure filings again reach lofty levels, the bankruptcy filings will again spike as people file to slow down the foreclosure sale," predicts Ted Connolly, a bankruptcy lawyer with Duane Morris and author of Road Out of Debt.
Simply put, there are better tea leaves for reading the economy than the bankruptcy numbers. "Mortgage foreclosures and depressed real estate values continue to be a drag on the economy," says the ABI's Leibowitz. "The best indicator of better times to come is the level of unemployment, which remains persistently high. Interestingly, temporary employment is increasing. This might be a leading indicator of better times to come."
Connolly, keeping it real, says: "The decrease in filings is too insignificant to portend an improving economy. Instead, the filing numbers continue to show a weak economy, teetering on the brink of a downward fall."