Bankruptcy Filings Down in 2011, Economy Not As ‘Starkly Dysfunctional’

Financial Problems.

The number of daily bankruptcy filings in America is down 10% from the same time last year; and one law professor says while its not a signal the economy is back on solid ground it means were on the way.

According to a June Monthly Bankruptcy Report from Epiq Solutions, the number of bankruptcy filings in June was 120,623, a drop of 6.2% from May, with 122,775 filings total. Average daily filings in June at 5,483 a day are down 10% from June of 2010.

Ronald Mann, professor of Law at Columbia University, said the main driving factors in bankruptcy filings throughout the recession were excessive mortgage lending and loss of employment and its adverse effects on the economy. While many filed for bankruptcy during the recession, many others who under the same strain would have been likely to file in the past instead weathered the storm, he said, therefore filings are downa trend he predicts will continue.

"What you would say is that a large number of households went under distress, or experienced a stress event, and many of those households have passed through the stress event and either filed for bankruptcy and moved on, or haven't filed," Mann said. "Others have gotten this far, and sense they can last it out because the economy is getting better. We are returning now to more of a natural level of filing."

Although filings are down overall, there is a huge amount of geographic variation, Mann said. In states like California, where filings are holding steady at last year's rates, the situation is not improving. California had among the greatest amount of sub-prime loans, Mann said, causing close to one in six U.S. bankruptcy filings to come from the state.

"Whatever is happening to cause filings to go down is not happening there," he said.

The relationship between consumer credit and bankruptcy is a tricky one, Mann said. In the long-term, access to credit can increase bankruptcy filings if it is abused and leads to greater debt. However, it can prevent bankruptcy filings if used properly in emergency situations.

"It is too simple to say that trends in bankruptcy follow trends in consumer credit," he said.

The economic recovery may be slow-moving; however Mann said it is moving in the right direction, despite its sluggish pace.

"People in distress now are more likely to believe that things will turn around in the next year than they were in 2009," he said. "In 2009, it would be easy to think that things would never get better. In 2011, the economy is not nearly so starkly dysfunctional."