There have been some positive news stories of late about a rising stock market and unemployment figures that are no longer rising. However, the American Bankruptcy Institute released numbers that show that consumer bankruptcy filings surged 14% in February from a year earlier. In total, 111,693 cases were filed, a 9% increase from January.
The higher number of filers does not reflect a worsening economy, but reflects the duration of the down times. American families have been living with joblessness, low housing prices, and tight credit markets for years, and many are unable to continue the uphill battle. The executive director of the American Bankruptcy Institute predicts that filings will top 1.5 million this year. Last year, there were 1.47 million filings.
Filers are now more likely than before to file Chapter 7 bankruptcy. Chapter 7, if approved by the bankruptcy court, allows the debtor to discharge unsecured debt and does not leave the debtor with a monthly payment. Only those making below the median income and with insubstantial assets may have a Chapter 7 plan approved.
On the other hand, Chapter 13 bankruptcies are decreasing. When Congress imposed a stricter bankruptcy code in 2005, one of the goals was to compel higher earners to file Chapter 13 bankruptcy, which requires filers to repay a portion of their debt over several years. Chapter 13 bankruptcy was in large part designed for homeowners who wanted to stay in their homes. But, so many homeowners are underwater in their homes that they have little incentive to stay. They sensibly decide to start over elsewhere with a fresh start.
An economic recovery may be on the horizon but there will be plenty of reminders of the Great Recession until then.
