Iowans filed 1,590 fewer bankruptcies in 2012, a drop that some bankruptcy attorneys are reluctant to credit to the slow economic recovery.
The total number of bankruptcy cases filed in Iowa’s bankruptcy courts fell 20.2 percent from 7,861 in 2011 to 6,277 in 2012.
Bankruptcy forgives repayment of certain debts and can often help a debtor keep possession of debt-encumbered property such as their house or car. In exchange, it provides a system for ensuring that the debtor pays as much of the debt as they can, and helps assure all creditors rights are honored equally.
The chief negative for debtors filing bankruptcy is likely to be a lowered credit score and reduced access to borrowing in the short term.
Bankruptcy filings statewide in 2012 were at their lowest level since 2007. In the Cedar Rapids Division of the U.S. Bankruptcy Court, the 762 bankruptcy filings were the lowest since 2006.
While key measures of Iowa’s economy improved during 2012, bankruptcy attorneys said they strongly suspect other factors weighed more heavily in the trend.
Not for everyone
Kevin Ahrenholz, a Cedar Rapids attorney who specializes in debt law, pointed out that many long-term unemployed aren’t good candidates for bankruptcy. That’s because they no longer have income for creditors to garnish or equity in a home that is at risk of foreclosure. The inability to come up with the filing fees and attorney’s fees also can prevent the most disadvantaged debtors from filing.
Bankruptcies spiked nationwide in 2005 before a federal law change that increased the requirements for obtaining bankruptcy protection from creditors, then again in 2009 after the economy went into recession.
Ahrenholz noted that federal law now prevents a debtor from filing Chapter 7, the most common form of bankruptcy, more frequently than every eight years. As a result, he said, many debtors are in a period during which they can’t file another Chapter 7.
American Bankruptcy Institute Executive Director Samuel Gerdano said last month that the leading bankruptcy research organization expects fewer than 1.4 million consumer bankruptcies nationwide in 2012, fewer than in 2011.
The decrease runs contrary to concerns that bankruptcies would soar in the years following the Floods of 2008, although one Cedar Rapids attorney believes business bankruptcies in Cedar Rapids are probably up.
“I’ve done a lot more work for businesses over the past few years than I’d done before,” said Cedar Rapids attorney John Heckel. He said many business owners file bankruptcy under their own names, making it difficult to easily distinguish the percentage of bankruptcies filed by businesses.
The flood forced many businesses that didn’t have flood insurance to take on a heavy layer of additional debt to restore their buildings and replace inventory and equipment.
Heckel said he’s heard that one factor in the overall bankruptcy decline has been the tightening up of credit by banks and other credit card issuers several years ago. With less access to credit, Americans are having less trouble paying it off, some experts believe.
Heckel said most bankruptcy filers he’s worked with over the last year have the same kind of debt problems he’s seen in previous years — unexpected loss of employment, loss of work hours, medical expenses or divorce that threw their previous household budget out of kilter.
Most bankruptcy filers in the area have household incomes of about $35,000 to $70,000, Heckel said, and haven’t been irresponsible in managing their household finances.“Everybody wants to think they’re in control of their destiny and above it all, but most of are dependent on our regular income to cover our expenses,” Heckel said.