The tightening of consumer credit during the economic downturn
may be paying off now, as the number of consumer bankruptcy filings
plunged by 14 percent during the first half of the year, continuing
the steep decline that began last year.
For the first six months of the year, there were nearly 627,000
bankruptcy filings in the 50 states and District of Columbia,
compared to almost 725,000 filings in the same time period in 2011,
according to figures from Epiq Systems. For state-by-state details,
see "State-by-state bankruptcy filing statistics, 2005-2012."
"It all has to do with the credit supply going back two to four
years," says Jean Braucher, a law professor at the University of
Arizona, as well as vice president of the National Consumer
Bankruptcy Rights Center and a member of the National Association
of Consumer Bankruptcy Attorneys' board.
During the depths of the recession, new credit was a challenge
for many consumers to obtain and companies cut credit card limits
and canceled cards.
Credit use curbed
As a result, some people curbed their spending out of economic
necessity, while others did so by choice, Braucher says.
That meant a substantial drop in consumers' use of revolving
credit. Outstanding revolving debt, which topped $1 trillion in
2008, bottomed out at $857 billion in 2010. It crept up to $870
billion in May 2012, which is still 13 percent lower than it was at
its peak, according to the Federal Reserve.
On the other hand, outstanding nonrevolving debt has climbed,
rising from about $1.54 trillion in 2008 to $1.7 trillion in
While total consumer debt exceeded $2.5 trillion both years,
revolving debt comprised almost 40 percent of total debt in 2008.
In May, it was down to about one-third.
"People are keeping debt levels down. That's what we've dreamed
about for years," says Bruce McClary, spokesman for ClearPoint
Credit Counseling Solutions.
Lingering concerns about the economy "leave people a bit
uneasy," McClary says. "As long as unemployment stays as high as it
is, it's going to be on everyone's mind when they get credit card
Credit card companies had been peppering consumers with credit
card solicitations again. And some banks are beginning to increase
their marketing of unsecured personal loans and lines of
The increased access to credit might help stave off bankruptcy
for some, Braucher says. "People who might be on the edge can now
get more credit. That means they can ride things out longer."
Card offers down
However, a study by Mintel Comperemedia, which tracks direct
marketing efforts, found that credit card offers sent to households
fell to 260 million in April, the lowest level in more than two
years. In June 2011, nearly 500 million offers were sent.
"Issuers have adopted a more cautious approach due to an
uncertain economic environment. The latest downturn likely reflects
a pause in activity rather than signifying a permanent reduction in
direct mail," Andrew Davidson, senior vice president, said in a
He predicted volume will again rise as the economy improves and
as credit card companies develop new ways to entice consumers to
sign up for new cards.
For the time being, with continued high unemployment, "People
are worried. It contributes to the lower amounts of debt," Braucher
Prior to the recession, many homeowners used their homes as
banks, borrowing against their equity to make purchases and piling
up mountains of credit card debt. When the housing bubble burst and
unemployment soared, a raft of bankruptcy filings followed in their
In 2010, bankruptcy filings reached nearly 1.55 million, up 8
percent from the previous year. In 2011, they dipped to less than
All 50 states see fewer filings
So far this year, all states and the District of Columbia have seen
a decline in the number of filings as compared to last year. But in
South Carolina, they're down a paltry 1 percent, while in the
District of Columbia they're down just 3 percent.
In contrast, other states, including those which had huge
numbers of filings in recent years, have experienced steep
declines. In Nevada, they fell 27 percent compared to 2011, while
California saw a 22 percent drop.
Nevada continues to lead the nation with the highest number of
filings per capita, at 7.06 for every 1,000 residents, followed
closely by Tennessee, with 6.99 filings per 1,000 residents.
Georgia and Utah both had more than six filings per 1,000
As could be expected, big states saw the greatest number of
filings. California ranked first, with nearly 100,000 filings.
Florida had almost 42,000 filings, while Illinois and Georgia both
But even the drop in filings doesn't mean everything is rosy.
Although the unemployment rate has dipped from 10 percent at its
peak in 2009 to 8.2 percent today, many people are returning to
work at lower wages than they once received. That means they're
likely to have taken on debt based on their previous earnings,
Braucher says. If they piled on more debt to weather a spell of
unemployment and now are working for less pay, it could lead to
more filings down the road.
More employment means more bankruptcy
And an improving employment picture also can prompt more bankruptcy
filings. "If you're unemployed, it's usually not a good time to
file for bankruptcy," she says. There are no wages to be garnished,
and people will continue to borrow if they can, simply to
"People file for bankruptcy when they get back to work,"
Braucher says. "There's something to protect."
The lingering effects of the housing crisis also can have an
impact on filings. "It all depends on whether banks move forward
with foreclosures," says William Schiller, chair of the American
Bar Association's Consumer Bankruptcy Committee and a founder of
Schiller & Knapp in Latham, N.Y.
Right now, many people aren't filing for bankruptcy because
foreclosures have stalled, Schiller says.
At their high point in 2005, bankruptcy filings reached about 2
million, driven by the Bankruptcy Abuse Prevention and Consumer
Protection Act of 2005. The law resulted in higher filing fees and
a means test for eligibility, and required counseling programs and
an eight-year moratorium before a person can file again.
Many consumers rushed to file before the law went into effect.
The upsurge in filings, along with time it took attorneys to adjust
to the new act, pushed filings down to 617,000 in 2006. They began
climbing in 2007 and continued on that path through 2010.
Braucher says many experts believe the number of filings will
decline for another year or two, then rise again. Typically, if
consumer debt increases, bankruptcies will increase two to four
years later, and when debt falls, bankruptcies will follow
"Most people think bankruptcy filings will come back, probably
in about two years," she says.