While the statistics from the United States Bankruptcy Courts are encouraging, it is not completely clear if the number of personal bankruptcies are down because there is less financial distress, or, because the folks that have not filed, but need to file, are simply unable to file for a discharge in Massachusetts bankruptcy because they simply can’t afford it.
In the first quarter of 2012, the number of personal bankruptcies was down 8% to 10% as compared to the same quarter in 2011, according to a Fitch study. Last year they were down 12% over 2010.
In a study undertaken by professors at Columbia University, the University of Chicago and Washington University in St. Louis, evaluating tax rebates, it was estimated that the number of personal bankruptcy filings were down by 200,000. That is, folks simply do not have sufficient funds to file. Personal bankruptcies are expensive. The 2005 Bankruptcy Abuse Prevention Act added significant requirements; this includes multiple statistical forms, reducing the time between bankruptcies, and, most significantly, capping the household income for filers in Chapter 7 cases. The filing fee alone was recently increased to $306. The new “credit counseling” required classes are at least $50 total. Legal fees are additional, and, of necessity, higher now because of the increased paperwork and verifications Massachusetts bankruptcy lawyers have to complete.
Nevertheless, it is not clear what will happen when the economy picks up even more: will more people have money to file, or will credit loosen up and give folks the opportunity to refinance houses and cars and will personal bankruptcies go down? We don’t pretend to make predictions here, but we are encouraged by the decrease in filings, in both Massachusetts and throughout the country.
Of course, as we have reported, Elizabeth Warren, in her Patriots Day interview at Fenway Park, said that the number one concern she has, going forward, is student loans; they are increasing in number and size, the default rate is increasing, the number of parents taking them is increasing, and they cant be discharged in a Massachusetts bankruptcy. Thus, they are in danger of being the next bubble causing the next crisis.
One thing we should point out to the bankruptcy skeptics out there; the bankruptcy laws in the United States, giving folks who cannot repay their debts a “fresh start” has been historically a great part of the financial success of the Unites States. For example, many economists blame the recent decades of Japanese stagnation on their cultural, political and legal inability to discharge bad loans and redistribute capital. When the French political scientist Alexis de Tocqueville undertook a comprehensive study of the United States in the mid 1800s, he remarked that
The Americans, who have turned rash [business] speculation into a sort of virtue, can in no case stigmatize those who are thus rash. That is the reason for the altogether singular indulgence shown in the United States toward a trader who goes bankrupt. An accident like that leaves no stain on his honor.
It is because bankruptcy was available to “everyone” that America was seen, by Tocqueville, as having economic equality, resulting in the ability to get that fresh start, whether you are a small business person, an individual, or an elite business.
In conclusion, the theory behind bankruptcy in the United States, which has survived hundreds of years, has proven to be in integral part of our economic flexibility and strength. As a Massachusetts bankruptcy lawyer, we encourage folks who need a fresh start to call us for a free consultation.