Depending on how you look at it, the latest news on consumer bankruptcy filings means things are getting a bit better or they’re getting a bit worse.
According to the American Bankruptcy Institute, US consumers filed 136,142 bankruptcies in May, a 9% increase over the 124,838 filings in May 2009. That’s the getting-worse part. In the same release, the Institute noted that the May filings were down 6% from April 2010. That’s the getting-better part.
For the first quarter of 2010, US consumer bankruptcies totaled 388,148, up from 330,477 in the same period of 2009. The first two months of the second quarter saw a total of 260,980 filings. Filings for this month would need to be about 120,000 to fall below last year’s second quarter total. Far more likely is that the second quarter total will settle around 390,000, an all-time high for quarterly filings.
Filings under Chapter 13 equaled 26% of the May 2010 filings, up slightly from April’s number of Chapter 13 filings. Virtually all the rest of the filings, 74%, were under Chapter 7.
The rate of growth in Chapter 7 filings was fairly stable in 2009, at around 71% in every quarter. The rate jumped to nearly 73% in the first quarter, and appears to be headed higher for this quarter as well. Under Chapter 7 liquidation unsecured debts may be discharged, where a Chapter 13 filing allows the debtor to restructure payments on all debts, including unsecured debts, provided that the debtor has a source of income.
More consumers are liquidating because they cannot make the monthly mortgage or because they cannot make the balloon payment that is due. One reason could be that lenders are holding on to their cash unless the prospective borrower is gold-plated.
Another reason could be the stubbornly high unemployment numbers. If a debtor doesn’t have a job or other source of income, Chapter 13 bankruptcy is not an option. Unless the US economy shows more signs of life and growth, unemployment will stay at or above 9% for the rest of this year. And bankruptcy filings will continue to rise.