Monday, August 15, 2011

Bankruptcy filings continue to fall in Athens area

Bankruptcy trends provide useful information but fuel much speculation. Does a drop in bankruptcy filings indicate the economy has improved or that most people who needed to file have already done so? Does it mean that people are finding better income to pay their debts or that they are just able to borrow more now that the credit freeze has thawed out?

Bankruptcy statistics in the U.S. Bankruptcy Court for the Middle District of Georgia (which includes Athens) show the number of filings continuing to drop since their recent peak in 2009. This trend cannot be easily observed on a daily basis since individual debtor attorneys like myself observe the short-term trends that follow seasons and even monthly payment cycles. However, comparing the first two quarters of this year still show a drop in comparison to the first two quarters of the previous two years.

Professor Bob Lawless of the University of Illinois explained on the Credit Slips blog that there is a relationship between total consumer debt and bankruptcy filings. ("Debt Causes Bankruptcy (But Sometimes in Counter-Intuitive Ways)".) Bankruptcies go up when the amount of consumer credit goes down and thus limits the options of borrowers. He also explained that bankruptcy is a lagging indicator and not a leading indicator. On an anecdotal level, I have indeed seen that some of my clients were pressured to investigate bankruptcy options when their credit card or home equity limits were dropped, and they often try to pursue various options for months or years before considering bankruptcy.

This June article from Reuters, "US consumer credit climbs in April for 7th month," observed that borrowing has increased but noted warnings that this increase is due to "tough economic times" rather than "an economic rebound." So the recent drop in bankruptcy filings does not really show an improvement in the economy, just an increase in the amount of credit available. (A rosier view is painted by Professor Ronald Mann of Columbia University on Fox Business.) Of course, there are many particular trends on a finer level of detail that affect bankruptcy filings overall, such as foreclosures, employment, income, and even changes in the rules that govern credit and bankruptcy.

All this means about bankruptcy statistics is that they are symptoms of economic changes but not a direct indicator of the health of the economy, at least on the shorter scale of comparing year to year. Over a period of years, however, they do seem to indicate the economic stress of the time period as long as they are considered in the context of the regulations and market trends of that period. (For instance, filings were pushed down in 2005 by new bankruptcy laws and pushed up in 2009 by the housing market crash.)

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