Decline in Iowa bankruptcies may not signal economic comeback

A decline in overall bankruptcy filings last year in Iowa likely doesn't reflect an economic recovery, some observers say, even though it defied a big nationwide bankruptcy filing increase.

Bankruptcies fell statewide by 3.6 percent to 9,705 in 2010, according to the United States Bankruptcy Courts for northern and southern districts of Iowa.

The slowdown in filings was even more pronounced in Linn and Johnson counties (see accompanying chart).

Three attorneys who practice debt law say they don't view the decline as evidence that the consumer debt situation is improving. They say consumers who are in the worst shape often don't file bankruptcy because they are “judgement-proof” or lack significant financial resources to protect from creditors through bankruptcy.

“I think people in Iowa are more reluctant to file bankruptcy than any place in the country because of the pride-based culture we have here,” said Rush Shortley, a Cedar Rapids attorney who specializes in debt matters.

Shortley sees many clients with “outrageously high medical debt,” he said.

Consumers are under “tremendous stress,” attorney David Nadler of Cedar Rapids said. Consumers are feeling pressure from job loss, medical costs, and mortgage foreclosures, among other things.

“There's a lot of hurt out there - a lot of hurt,” Nadler said. About 40 of the roughly 100 bankruptcies Nadler filed for clients last year involved home foreclosures, he said.

Attorneys said they see little evidence consumers who have the potential to pay back creditors are trying to use bankruptcy as a shield.

“Most of my clients are so broke they can barely pay attention,” quipped Cedar Rapids attorney Delmer Werner.

Werner's work with consumers on debt issues has been steady for the past three years, he said.

If there's a relationship between the June 2008 flood and the decline in bankruptcy filings is a little unclear.

Nadler said he thinks the number of flood-related bankruptcy filings has tapered off.

Shortley said he thinks that many flood victims have been struggling along with rising debt burdens, hoping for buyouts of flooded properties this year that will allow them to clear many of their debts.

Shortley said he credits strong crop prices and Iowa's strong agricultural economy with helping Iowans avoid the increase in bankruptcy filings that most of the nation has seen.

“It keeps people employed who otherwise might not have been employed,” he said.

One other factor that could be weighing down bankruptcy filings is the eight-year bank on repeat consumer filings.

Bankruptcy filings topped out in Iowa in 2004, as consumers rushed to get ahead of a reform law that they feared would limit their access to bankruptcy protection from creditors. That means many consumers can't file again until 2012, according to Mary Weibel, clerk for the bankruptcy court's Des Moines-based southern district.

“We predict 2012 will be a big one,” Weibel said. “That will be the repeat filers – the eight years.”