Bankruptcy Filings on the Rise

There's still no light at the end of the tunnel for our economy, as the latest figures report a startling rise in the number of bankruptcies. Famous blogger and editor Tim Cavanaugh once said, "bankruptcy never felt so good." Unfortunately, his quip isn't likely to stir up any laughter among the crowds of insolvent debtors who are waving the white financial flag of bankruptcy.

Struggling economy too much for debtors

Bankruptcy filings ramped up in the second quarter of 2008, suggesting that the higher unemployment rate, rising inflation, and housing sector meltdown are causing real problems for debtors. Between July 1, 2007 and June 30, 2008, 934,009 people filed for bankruptcy-that's 28 percent higher than the number reported for the prior 12 months. Business bankruptcy filings numbered almost 34,000, or 41 percent higher than the previous year.

This year looks even more discouraging.  The American Bankruptcy Institute predicts that the courts will receive a total of 1.2 million filings in 2008.

In the face of these rising numbers, financial experts wonder how bad things can get for debtors and their creditors. When the former receive Chapter 7 bankruptcy protection, the unsecured creditors are largely forced to write off the debt.  In the 12-month period ending June 30, 2008, Chapter 7 filings numbered 615,748, some 36 percent higher than the year before, and almost 80 percent more than Chapter 13 filings during the same period. This is bad news for an already stressed financial services industry, and potentially foreshadows rising credit card rates and more restrictive underwriting practices.  

Regional bankruptcy following housing sector

California, Arizona, and Nevada are among those states experiencing a pronounced pullback in the housing sector. These Sunbelt states also reside within the Bankruptcy Court's Ninth Circuit, which recorded a whopping 60.9 percent increase in filings during the 12 months ended June 30.   

The Bankruptcy Court's Sixth Circuit had the largest total number of filings at 167,561, but this was only a 21.2 percent increase over the prior 12-month period. The Sixth Circuit includes Kentucky, Michigan, Ohio, and Tennessee.

Historical perspective

Back in 2005, Congress passed the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA). One of the legislation's objectives was to reduce the ease with which debtors could have their debts wiped away through a Chapter 7 filing. After BAPCPA went into effect, the number of filings dipped noticeably in 2006 and 2007, suggesting that debtors were finding a way other than bankruptcy to pay off their obligations. Unfortunately, the 2008 numbers are back in line with those reported prior to the passing of BAPCPA.

The rising number of bankruptcy filings is just another bit of bad economic news for consumers and businesses to absorb. In these dire circumstances, it will take much more than a well-timed joke to ease the fears of those who hang on the edge of financial solvency.