Bankruptcy filings hit 20-year lows
Federal bankruptcy filings have plummeted to 20-year lows across the country, including Western Pennsylvania, but that doesn't mean the economic fortunes of the broke have improved one cent, observers say.
The No. 1 factor affecting the record-low filings is a law enacted by Congress in October that requires people seeking bankruptcy to use future income to repay a larger percentage of their debts -- compared with none in many cases before the law changed. That caused filings to increase sharply in the last quarter of 2005, then drop off dramatically this year.
"Changing the law impacts the ability to treat a problem, not the problem itself," said Samuel Gerdano, director of the American Bankruptcy Institute, a research group in Alexandria, Va. "Some critics have said this is akin to trying to reduce disease by closing hospitals."
The institute does not take a position on the law, but Gerdano said he believes filing for bankruptcy should be an option available to anyone who needs it.
"But the new law clearly has served to suppress the number of people filing," Gerdano said.
Bankruptcy filings during the first six months of this year are at the lowest level since 1986. In the first six months of this year, 272,604 cases were filed nationwide. In the same period last year, 868,482 cases were filed.
In Pittsburgh's federal bankruptcy court, filings dropped 63 percent.
Fewer than 5,000 bankruptcies were filed in Western Pennsylvania through June 30. More than 12,000 were filed during that time last year; more than 30,000 were filed in all of 2005.
The main goals of the new bankruptcy laws were threefold, Gerdano said. First, lawmakers wanted fewer overall bankruptcy filings. Second, they wanted more people to file under Chapter 13 than Chapter 7, which allowed filers to repay far less than they owed. Third, Congress wanted to promote alternatives to bankruptcy, including debt and credit counseling.
Consumer spending, mostly backed by household debt, has driven a strong U.S. economy. And out-of-control spending can put people in financial trouble quickly after an illness, layoff or other unexpected event, Gerdano said.
"There is an economic saying: 'If something can't go on forever, it won't,' " he said.
Consumer spending might decline soon, said Carnegie Mellon University economics professor Stephen Spear. Although a hot housing market has driven the economy without an increase in personal disposable income, the housing market decline and a recession -- here or approaching -- will force people to spend less, he predicted.
But that might not keep bankruptcy filing rates down.
"It could tend to push it up," Spear said.
Michelle White, an economics professor at the University of California, San Diego who works on personal bankruptcy issues, said the number of filings could increase in coming years, but she doubted it would return to record highs in recent years.
Although she thinks the new law goes too far to protect creditors and lenders, White said the old law made it too easy for people to manipulate bankruptcy filings in their favor -- maxing out credit lines while limiting the amount they needed to repay.
The cost of filing bankruptcy is a problem, White said. Court and legal fees used to be less than $1,000; the cost now is almost $3,000, she said.
"These new costs are going to fall most heavily on the people who don't have any money," she said. "The high cost is discouraging people who need it most, but who can afford it least."