Consumer bankruptcy filings have been on a steady decline since 2010, both nationally and in Tennessee, but with the economy improving, bankruptcy experts say declining unemployment rates could actually spur a new spate of filings in 2014.
If a person is struggling to make payments and is relying on unemployment benefits, for instance, there is little reason to file for bankruptcy because there is typically less to protect. If, however, that person finds work, he typically has more to lose and may seek to protect earnings by filing for bankruptcy.
"As more people become employed, you'll see the bankruptcy filing rates start to come back," said Hank Hildebrand, a Chapter 13 trustee in Nashville. "If you are getting unemployment or living on Social Security, they can't take anything from you. … Once you get that job, you just don't want to have (wages) garnished."
Consumer bankruptcies in the United States fell to 988,215 in 2013, dropping 12 percent from 2012, according to data from the American Bankruptcy Institute, citing Epiq Systems Inc. Consumer bankruptcies exceeded 1.53 million in 2010, up from 573,203 in 2006, as millions of American lost jobs amid the financial crisis and recession.
Tennessee consumer bankruptcies dropped to 40,181 in 2013, down from the state's recession peak of 50,971 in 2009, according to Epiq Systems.
Hildebrand attributes the decline to the increased cost of bankruptcy, rather than an improved economy. In 2004, the year before Congress passed a new law that made it more difficult to qualify for bankruptcy and more expensive to file, Tennessee recorded more than 60,500 filings, based on data from U.S. courts.
Attorney and filing costs can be as high as $1,500 for Chapter 7 filings and $4,000 for Chapter 13 filings, according to estimates from Nashville bankruptcy attorneys and trustees. The average attorney fee for Chapter 7 bankruptcy was $712 in the early months of 2005, according to the Government Accountability Office.
2014 could see rise
The overall bankruptcy decline in recent years is also likely tied to the tightening of credit markets, said Nashville consumer bankruptcy attorney Maria Salas. As credit markets loosen, the number of filings could also rise as a result.
"Pre-2008, if you had a pulse you could get a mortgage loan," Salas said. "After the crash, it was harder for anybody to get a loan. If you can't get a loan, you can't get in trouble with the loan. … Now that the economy is getting better, it's easier for the average Joe to go get a car loan or a mortgage loan."
With wages close to stagnant, student loan debt weighing heavily on graduates and interest rates poised to begin rising, Nashville consumer bankruptcy lawyer Mark Podis said he, too, expects the downward trend of filings to reverse course this year, especially for Chapter 13 filings. A Chapter 13 filing gives a debtor three to five years to catch up on payments without giving up assets and is used for those who make too much money to qualify for a Chapter 7.
"2014 is kind of like the year of the perfect storm," Podis said. "We'll see not only an increase, but it could be sort of a volcanic explosion of bankruptcies. Bankruptcies increase when people are working and spending, buying cars, refrigerators, washers and dryers."
The drop in filings could be people just waiting for the right time to file for bankruptcy. Those struggling should continue to exhaust creditresources until they hit rock bottom, said John McLemore, a Tennessee bankruptcy trustee; otherwise they find themselves right back where they were before filing. A significant drop in unemployment could prompt those who found jobs and were waiting for the bottom to seek a fresh start.
"Make it to the bottom, then get yourself a job and head out," McLemore said. "Don't file when you are going to have continued debt accumulation."
Unemployment, combined with a related loss of health insurance, is a leading contributor to bankruptcy, Hildebrand said. Especially with rising health care costs, a lack of insurance when a health issue arises can be the beginning of a downward spiral. Divorce and the end of a joint income can also be a catalyst for many.
Hildebrand cautioned that filing should not be done without strong consideration first because bankruptcy is expensive and it damagesyour credit score, limiting financial options in the future.
"Don't file unless you have to file," he said.