Recession Causes Bankruptcy Boom

According to a report released by the National Bankruptcy Research Center, personal bankruptcy filings are up 34 percent in January 2009 as compared to January 2008. Compared to the previous month, December 2008, filings were up 4.5 percent.

These increases are no doubt a consequence of the current economic crisis. The National Bureau of Economic Research (NBER) reports that the United States’ economy entered recession in December of 2007.

Traditionally, recession has been defined as two quarterly declines in gross domestic product, but the Business Cycle Dating Committee of the NBER has taken a more comprehensive approach to defining recession. “A recession is a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in production, employment, real income, and other indicators.”

-NBER, Determination of the December 2007 Peak in Economic Activity, December 11, 2008

Justin Berton, San Francisco Chronicle staff writer, wrote an article titled “Economic Woes Lead to Bankruptcy Boom,” in the January 13, 2009 edition. He reports that membership in NACBA, the National Association of Consumer Bankruptcy Attorneys, has increased by one third in 2008 to 3,200 practicing attorneys.

In 2005 bankruptcy filings skyrocketed to over two million non-business filings, due mostly to anticipation of the Bankruptcy Reform Act of 2005, which took effect on October 17, 2005, making filing bankruptcy much more difficult.

Those who were in poor financial shape had a strong motivation to file bankruptcy before the new law went into effect, rather than to try to work their way out of debt, since they would no longer have the insurance policy of bankruptcy after October 2005.

The Bankruptcy Reform Act of 2005 increased the amount of work it takes to file and decreased eligibility. Filers are also now required to take credit counseling and debtor education classes. Filings in 2004 had actually decreased to 1.56 million filings from the 1.625 million filings in 2003.

In 2006, predictably, bankruptcy filings crashed. Two effects were causing downward pressure on filings. First, filing demand had been cannibalized because many of those who would have, in the absence of the reform act, waited to file in 2006 were motivated to file in 2005 to avoid the restrictive new laws. Second, the restrictive new laws simply made many who previously were eligible to file ineligible.

What the credit card lobby took away through the Bankruptcy Reform Act, the tanking economy has given back. Many more United States citizens are now eligible to file bankruptcy, though no doubt, they’re not happy about it.

Source by David Zwiefelhofer

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