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Declining Bankruptcy Filings May Not Last

Consumer advocates breathed a collective sigh of relief last month as statistics showed that fewer Americans filed for personal bankruptcy in May than they did in April.

While this was welcome news for a still struggling economy, the reduction in personal bankruptcy filings may only be a temporary phenomenon.

Despite the 6 percent reduction in bankruptcy filings during May 2010, experts at the American Bankruptcy Institute expressed concern that this reduction does not accurately reflect the overall national trend.

Samuel Gerdano, the Bankruptcy Institute’s executive director, told the Wall Street Journal that “the overall arc” of national bankruptcies is trending upwards, and he believes that the bankruptcy filing rate will soon begin to rise again.

Why the Long-Term Bankruptcy Concerns?

Such an opinion is not founded in pure skepticism, as personal bankruptcy filings are still up 9 percent from this same time last year, according to statistics from National Bankruptcy Research Center. In addition, filings in 2010 are up more than 15 percent compared to the first five months of 2009.

Other indicators besides comparisons to 2009 also suggest that bankruptcy filings will continue to rise over the long term.

First, American consumers still face high levels of debt and the national unemployment rate remains uncomfortably high.

Second, a key economic stimulant, the success of small business owners, is also compromised due to the stifling credit conditions. These businesses are often supported by their owners’ personal lines of credit, and as the businesses continue to struggle, more of these owners may face bankruptcy themselves.

Predictions for the Rest of 2010

Gerdano estimates that personal bankruptcy filings could reach 1.6 million this year, passing the mark of 1.4 million set in 2009. This is noteworthy because the totals in 2009 were the highest marks since many people rushed to file in 2005 before Congress made sweeping changes to existing bankruptcy laws.

In addition to the economic indicators, the oil spill in the Gulf of Mexico may also contribute to a rise in personal bankruptcies in southern states like Louisiana and Mississippi, where the economies along the Gulf have been turned upside down. Many industries dependent on the Gulf, such as fishing and tourism, have been hit hard by the ongoing spill.

Speaking about the oil spill, Gerdano said that “[h]istorically there is a correlation between these kinds of natural disasters and subsequent bankruptcy filings.”

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