Bankruptcy courts are quiet places these days, at least compared to previous years.
Corporate and consumer bankruptcy filing rates are at their lowest point in about a decade, according to a new report from Supreme Court Chief Justice John Roberts.
September 2010 court statistics show that during the depths of the Great Recession, almost 1.6 million bankruptcy petitions were filed, with 1.53 million consumer cases making up the vast majority of the cas eload.
Eight years later, the amount of new cases has been cut by more than half. In September 2018, there were more than 770,000 cases filed from broke businesses and individuals looking to get their finances together through court-ordered debt-forgiveness and repayment plans. Consumers accounted for 97% of the cases.
People may not be filing for bankruptcy because it’s too expensive to do so, and they might have too few assets to protect.
In fact, bankruptcy petitions haven’t been so low since 2007, Roberts said Monday in his annual summary of the federal courts.
Yet the relative silence in bankruptcy court halls, at least when it comes to consumer cases, might not be entirely golden.
People may not be filing for bankruptcy because it’s too expensive to do so, and they might have too few assets to protect, bankruptcy experts told MarketWatch. Besides, some added, more cases might be around the corner.
“People can’t afford paying lawyers to file for bankruptcy,” Chicago attorney Lorraine Greenberg said. She cited a 2005 legislative overhaul. The Bankruptcy Abuse Prevention and Consumer Protection Act generated more work for lawyers, who were forced to raise their own rates for clients, she said.
Bankruptcy cases can be expensive
Greenberg said she charges $1,500 up front to file a Chapter 7 case, where debtors sell off their assets and can have certain debts forgiven. That price doesn’t include the court costs and fees debtors also have to incur, she said. Those prices can hover around $350, she noted.
She has about three feet of shelf space devoted to documents from people ready to file bankruptcy cases once they get the money to hire her. “I’m never going to see it. … They have no disposable income to pay their attorney,” she said.
‘Bankruptcy trails recovery. When people have something they have to protect, they file for bankruptcy.’
One 2017 study pegged average attorneys’ costs on Chapter 7 cases at around $1,200, paid up front. Debtors typically paid around $3,200 for lawyers to file Chapter 13 cases; those fees were paid over time as a part of the case’s resolution. (Chapter 13 allows for court-confirmed installment plans to creditors.)
The flip side of the findings was the fact that older Americans are filing for bankruptcy at out-sized rates, grappling with too little income and health-care costs that are too expensive.
But Ricardo Kilpatrick, a Michigan-based attorney representing creditors in consumer bankruptcy matters, said there were a number of reasons behind the drop-off in petitions, including attorney costs. “Bankruptcy trails recovery,” he said. When people have something they have to protect, they file for bankruptcy,” he said.
Still, Kilpatrick, a past president with the American Bankruptcy Institute, said consumer filings 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 Friday said the American economy gained 312,000 new jobs in December. The unemployment rate edged up to 3.9% from the 49-year low of 3.7%. The slight rise could actually be a good thing, indicating that people think it’s easier to land a job.
Kilpatrick recalled conversations last month with four separate lawyers for debtors. Three of the four told him it was the busiest December they’ve had in the last six years, Kilpatrick said.
Chicago attorney Lorraine Greenberg said the Affordable Care Act could help people avoid bankruptcy due to unpaid medical bills.
Reasons for the drop-off might not all be gloomy. Greenberg said there could be a link with increased health care coverage under the Affordable Care Act. “Less people need bankruptcy to wipe out medical bills,” she said.
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Another explanation: Recession-era federal mortgage programs that enabled distressed homeowners to work out deals with lenders also helped people avoid filing for bankruptcy, lawyers told MarketWatch. Creditors “became much more accommodating on doing out-of-court work-outs,” Kilpatrick said.
Roberts’ recent report said filings “rose steadily” from 2007 to 2010, “but they have fallen in each of the last eight years.”
That slide in bankruptcy petitions largely coincides with a historic nine-year bull run on Wall Street — a streak that could be close to an end amid worries about an economic slowdown.
The slide in bankruptcy petitions largely coincides with a historic nine-year bull run on Wall Street, a streak that could soon come to an end.
But bankruptcy rates don’t necessarily mirror the country’s overall economic health. “It really has not tracked the economy exactly,” said Henry Sommer, a past president of the National Association of Consumer Bankruptcy Attorneys. Filings were high in the late 1990s when the economy was humming along and consumer credit was easy, he said.
Bankruptcies seem to more closely follow Americans’ debt-to-income ratio, according to Sommer. The figure shows how leveraged a household is, dividing its monthly debt payments by its income. Aggregate household debt to income ratios ramped up in the early 2000s and then started falling in 2008, Federal Reserve data showed.
Despite record levels of credit-card debt, households are still in a better position to pay off their debts than they were during the recession.
The $1.5 trillion gorilla
Another possible factor in the decline of bankruptcies: America’s student-loan crisis. Americans now owe $1.5 trillion in student debt, and the repayments efforts can be soul-crushing for some.
But borrowers have a difficult time legally proving the repayments are an “undue hardship,” which means filing for bankruptcy wouldn’t help them much.
“As a practical matter, it’s virtually non-dischargeable in all cases,” Sommer said of student debt. Courts won’t wipe out “non-dischargeable” debts.
And cash-strapped student-loan borrowers may not be driven to bankruptcy simply because they do not have enough money to rack up other forms of debt, like debt from credit cards, Sommer said.
In fact, consumers between the ages of 18 and 34 had fewer bankruptcies over the last decade per every 1,000 people, compared to people age 65 and older, Foohey’s research has found. “These are people who are saddled with student loans,” she said, making it tough for them to build up other assets.
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