An 8 percent decline this year in bankruptcy petitions nationwide might appear to be a positive economic sign, especially for a country rocked by stock market volatility, a credit downgrade, and continued labor and housing woes.
Some industry experts, however, warn that optimism is not in order. The number of bankruptcies may be down, they say, simply because people can't afford to file and because there's little pressure from creditors to do so.
The result may be a mass of looming bankruptcy cases, not unlike the shadow foreclosures feared in the real estate business. If the economy doesn't take a sharp turn for the better, those who have been teetering on the brink of bankruptcy eventually will be forced to file. What the impact of a large number of bankruptcies would be is unclear.
Jack Williams, a Georgia State University law professor who specializes in bankruptcy, said there's no indication that the number of bankruptcies is down as a result of people being better off. "The economy hasn't turned," he said, "and, if anything, it may be going back down."
In the future, he added, "we'll see a lot more people who have weathered the storm so far but cannot hold on any longer."
He refers to the group as "the invisible class of debtors who can't afford to file."
It can cost as little as a few hundred dollars to file for bankruptcy, but the tab can jump to several thousand dollars depending on the complexities of the filing. People who have a house, for example, would pay more.
"We see people every day who can't afford to file," said Matthew Berry of Berry & Associates, a metro Atlanta bankruptcy law firm.
Ironically, the number of bankruptcy petitions likely will rise when the employment situation improves, Berry said. When they are back at work, financially troubled individuals will be able to pay the price to file, and they will have the income to pay their creditors.
"As they go back to work," Berry said, "collectors become more aggressive, and that will force them into bankruptcy."
Besides the inability to pay, there is another reason there are not as many filings as might be expected, said Doug Erickson, vice president of Atlanta-based Credability. The nonprofit offers budget and credit counseling, debt management plans, housing and bankruptcy counseling.
Some individuals who might otherwise file for bankruptcy under Chapter 13, in which they would repay their creditors over time, are unable to do so because they are unemployed, he said. As a result, they don't have the income to make repayment under a court-directed plan. The other choice, Chapter 7, in which debts are discharged, may not be an option, either.
As a result, Erickson said, "they're kind of stuck."
Just how many bankruptcy cases are lurking in the shadows is unknown. Experts who suspect a large number of dormant cases base their assessments on the state of the economy and the number of filings at this time, which is lower than what would be expected given the dire condition of the economy.
Shadow bankruptcy cases are a concern in the business world, too, particularly for small companies. In some case, troubled firms don't file for bankruptcy, Williams said. Instead, they "just pitch the keys to their secured creditors, say ‘take your collateral' and walk away."
James Kroll, operations manager for the Atlanta office of Riviera Finance, which buys accounts receivable from client businesses and then attempts to collect on them, said payments from debtor companies have slowed from about 34 days on average to more like 40. But, he said, he hasn't detected an upsurge in bankruptcies.
"It's been strange," Kroll said. "Given the economic climate, I'm frankly surprised that we haven't seen a higher frequency of bankruptcy filings in the past six months to a year."
One reason why, he said, might be that lenders have little incentive to force debtors into bankruptcy.
On the face of it, this year's bankruptcy filing numbers may suggest better times are here.
For example, small business bankruptcy petitions (for companies with 100 employees or less) in metro Atlanta declined more than 21 percent in the first quarter of 2011 from the first quarter in 2010, according to a study by Equifax, the Atlanta-based information solutions company.
But, Equifax analyst Reza Barazesh said, the rate of decline has slowed. In metro Atlanta, for example, bankruptcies fell less than 3.5 percent in the first quarter of 2011 from the fourth quarter of 2010.
Barazesh said, however, that "it's too early to tell if the trend in reversing."
The next quarter or two will shed light on how much economic trends are affecting small companies, he said, especially those that failed but never formally dissolved their businesses. And while small-business bankruptcies have decreased in many regions, he said, year-over-year levels far exceed 2008 pre-recession numbers. For example, total U.S. small-business bankruptcies in the first quarter of 2011 are more than 30 percent higher than in the first quarter of 2008.
Total bankruptcies in the the U.S. declined 8 percent in the first six months of 2011 compared with the same period in 2010. But total filings actually increased 4 percent in the second quarter of 2011 from the first quarter of 2011 because of an increase in consumer petitions in the quarter.
Not all observers are forecasting an increase in bankruptcy filings.
Samuel Gerdano, executive director of the American Bankruptcy Institute, citing factors including tighter consumer credit, said, "We expect to see fewer consumer bankruptcies in 2011 than were filed in 2010."
Williams and others see it differently.
"There will be a time when we will see a very large increase in bankruptcy filings," he said. "The pipeline is stocked up with them."
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