Despite the economic downturn, recently a rather surprising statistic was announced, June ended with a decline in bankruptcy filings. This dip is welcomed news after a long stretch of the same old depressing economic downward spiral.
The drop in filed bankruptcies was a fairly impressive 6.2 percent drop from May, and an even better 10 percent decrease compared to June 2010. Bankruptcy filings in New York were down five percent. These figures seem to offer a glimmer of hope; some may begin thinking things may finally be looking up for the economy. According to experts, however, this optimistic view may be a slight jump of the gun.
Experts point out that although factors like unemployment and foreclosures may impact the rate of bankruptcies, bankruptcy filings seem to be most closely tied to consumer credit and debt. Therefore what may be driving the decline in bankruptcies is the fact that Americans had less access to credit the past few years and thus less debt to discharge. Now consumers are being given more credit, so consumers can use this additional credit to get them through rough financial times. In sum, the fact that fewer Americans filed for bankruptcy does not necessarily provide evidence that the economy is any healthier.
Types of Bankruptcy
Chapter 7 bankruptcies have made up the majority of bankruptcy filings this year, almost 70 percent. A Chapter 7 bankruptcy provides those buried in debt with a fresh financial start. This type of bankruptcy is contingent on qualification, as filers must prove through a means test that they are unable to meet their current debt burden.
A Chapter 13 bankruptcy essentially restructures debts into an affordable three to five year repayment plan. Chapter 13 bankruptcy can prevent the loss of homes to foreclosure, but requires the filer to honor portions of their debt over the course of time. A little less than 28 percent of bankruptcy filings this year fell under Chapter 13. Mostly commercial filings make up the remaining cases.
Declining bankruptcy filings, however, should allow for some optimism. Even if the drop in bankruptcies is a result of shifts in available consumer credit rather than an improving economy, at least it indicates that perhaps the debt burden of Americans is decreasing.