According to data from 2012 and the first half of 2013, consumer bankruptcy filings are down, and experts expect the trend to continue.
In 2013, the government released data showing that consumer bankruptcies were down 13 percent in 2012. For the first half of 2013, bankruptcies were also down 13 percent from the same period in 2012. Sam Gerdano, executive director of the American Bankruptcy Institute, said that due to current low interest rates, households were “deleveraging.”
Deleveraging refers to reducing debt such as high-interest-rate credit cards, mortgages and vehicle loans, which can be accomplished by refinancing at a lower interest rate, taking advantage of government programs and avoiding taking on additional debt. Deleveraging is a step that can result in a better financial position for the individual consumer, making it less likely that a person will need to file for bankruptcy. Experts expect the deleveraging trend to continue.
According to Gerdano, the Home Affordable Refinance Program (HARP) has made it possible for many homeowners to refinance their mortgages and has contributed to the decline in bankruptcy filings.
Over time, fluctuations in bankruptcy filings have been caused by changes in the economy and the law. Filings peaked in 2005, with 2 million consumers declaring bankruptcy that year. The following year, Congress passed a reform bill that tightened bankruptcy requirements. Filings dropped to 600,000 in 2006, but then rose each year until 2010, when 1.5 million consumers filed for bankruptcy. Since 2010, filings have dropped steadily each year.
The rise in consumer bankruptcy filings coincided with the economic downturn. Now, although the economy has not been restored to full health, experts say that consumers are taking steps to deal with debt and are avoiding taking on additional debt. The bankruptcy reform of 2005 also contributed to the decline in filings, as it made filing for bankruptcy a less attractive option.
Although bankruptcy is now more expensive and less forgiving, it is still an important option for consumers experiencing overwhelming debt.
The decline in bankruptcy filings is an important indicator of the overall health of the economy, showing that fewer consumers are in financial distress. And, while economic predictions are famously prone to error, experts say that with a continued decline in unemployment, low interest rates and the help of government programs like HARP, the decline in filings could continue well through 2014.