The number of individuals filing for bankruptcy has seen a national decline in recent years, and 2014 is on track to be the lowest average number of filings since 1995. The exception to this decline is the period in 2005 when the bankruptcy rules changed and tightened the qualification requirements. Many debtors rushed out that year to elude the anticipated changes in the law, which spiked the number of filings, and then the figure dropped in 2006 to less than average. For 2014, the number of filings is on track to be around 900,000.
Possible Factors Contributing to the Decline
This a steady decline to current rates of under 3 filings per 100 persons that may be due to several factors. Bankruptcy typically results from excessive household debt, and debt levels have actually declined if student loans are subtracted from the national totals. Student loans make up a greater portion of household debt than in previous years, and that type of debt cannot be discharged in bankruptcy.
Consumer debts are often the culprit in creating conditions for bankruptcy, and there may be more stringent lending practices today by banks and credit card companies. Even though credit seems easy to obtain, lenders have become more skilled at detecting potential defaults before they happen. The result is more available credit, being held by higher qualified individuals.
Another factor in the decline may be the increase of debt reduction and debt negotiation strategies. Whether this is done independently or with the help a debt negotiation firm, it allows for repayment of debt at a percentage of the original loan. Sometimes these amounts are significantly less, discounted as much as 50-60%, providing an incentive for the debtor to pay it and avoid bankruptcy.
Banks have learned that it is wiser to take a lower payoff amount than to hold the line and drive someone into bankruptcy. Often, a creditor will not get anything in a Chapter 7 filing, so accepting a payoff seems like a smart option. In the event of a credit card or loan default, a bank may make several offers for lower payoff amounts and attempt to avoid the cost of collection or litigation. Some borrowers may look at this option as preferable to bankruptcy, and a means to preserve their credit rating.
While the national filing rates are in decline, there are regional differences depending on local economic factors and demographics. There is still a widespread use of the bankruptcy laws to discharge many types of debt, but the changes to the law in 2005 may have had some influence in contributing to the decline. The use of means testing and more stringent qualification, as well as mandatory credit counseling may be having the impact that was desired when the laws were changed.