Fewer bankruptcy filings no cause for celebration

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Updated: February 6, 2012 8:53PM

Bankruptcy filings in Northwest Indiana were down by almost 1,000 in 2011 compared with 2010, but officials say it’s not a sign of economic improvement.

“If nothing else, I think it’s a lull before the storm,” Kenneth Manning, a local U.S. bankruptcy trustee for Chapter 7 filings.

The U.S. Bankruptcy Court in Hammond saw 4,909 total bankruptcy filings in 2011, according to data from the court. That’s about a 16 percent drop from 2010, when the area had 5,383 filings. It’s also lower than the 2009 total of 5,588.

Individually, both Chapter 7 and Chapter 13 filings dropped in 2011. Chapter 7 filings, or liquidation, went from 3,474 in 2010 to 2,864 last year. Chapter 13 filings, which reorganizes the debt and doesn’t force the debtor to sell all the assets, decreased from 2,348 in 2010 to 2,038 in 2010.

Manning said that from what he has seen, however, the reason more people didn’t file for bankruptcy is because their situation was so bad they didn’t need to. Creditors will usually force payment by getting a judgment against the person who owes money.

There are three ways of enforcing that judgement including garnering someone’s wages. However, if the person doesn’t have a job, there are no wages to garnish, Manning said. Similarly, the creditor can also collect by placing a lien against a person’s bank account, which they will clean out before the judgement, or by placing a lien against any real estate property. If the property is already underwater, though, it does the creditor no good, Manning said.

“There’s a lot of people out there that are likely candidates for bankruptcy,” Manning said. “But there’s no reason to file because there’s nothing the creditors can do to them.”

The back-up in foreclosures has also likely helped decrease the number of filings, Manning said. Banks could force people out of their homes, but then it would just leave the home empty. With a large stock of empty foreclosed homes still waiting to be sold, he said, some banks find it better to let people remain in the homes.

The ironic twist is that an upturn in the economy will likely mean more bankruptcy filings, Manning said. As people who owe money start to get jobs again, their creditors can finally start to garnish their wages.

However, Daniel Freeland, another local Chapter 7 bankruptcy trustee, didn’t have such a negative view of the decrease in filings. Instead, he said a major factor is likely the change of bankruptcy filing rules six years ago. The federal government made it harder for people to file, so there was a mass filing of bankruptcies in 2005 so that people could file under the old rules instead of the new rules. Those people can’t file again until 2013, Daniel Freeland said, and anyone else who has filed after would have been blocked from filing again last year, too.

“So you have a natural decrease in numbers,” he said.

He did say that the numbers are not a sign of economic recovery, however.

For those who are filing bankruptcy, Freeland said he is seeing a lot of people filing to walk away from homes that went underwater. State laws actually provide protection for home owners to keep some of the equity built into their homes, Freeland said, which entices them to try and keep the home. If there is no equity, however, there’s no motivation to keep the home, Freeland said.

Manning said he has seen similar situation in that people have absolutely no assets. In the past, people would still list assets, just at a value less than their debts. The more recent filers, however, don’t seem to have even that, he said.

“They’ve got nothing,” Manning said. “Zero equity in the house, they don’t even have a car that they’re paying on.”

The other trend, Manning said, is that young adults with massive amounts of college debt. Manning said that many of these filers racked up anywhere from $20,000 to sometimes more than $100,000 in student loans to go to college. The bad economy forced them to take low-paying jobs such as waitressing, however, and they couldn’t afford to pay back the loans.