More People Filing Bankruptcy in 2005 - 2006 Despite New Law
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Bankruptcy Trends: More People Filing Bankruptcy

Newspapers around the country continue to report that bankruptcy filings are down significantly since the new bankruptcy law took effect in October, 2005. And they are. But the straight comparison between early 2005 filings and early 2006 filings doesn't tell the whole story.

Many consumer bankruptcy attorneys and other financial industry professionals attribute the drop-off less to the change in the law than to the rush of filings just prior to the law change in October.

In the weeks leading up to the effective date of the new statute, approximately half a million consumer bankruptcy cases were filed.

Since that's about 1/3 the number filed in a typical year, and brought the 2005 total to an all-time high, many cases that would likely have arisen during early 2006 were filed earlier.


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Because publicity surrounding the law change indicated that it would be significantly more difficult to file bankruptcy after October 17, many consumers who were on the edge of filing bankruptcy felt they had no choice but to go ahead and file "while they had the chance".

The reality, of course, has been that filing is more time-consuming, more expensive, and a bit more of a hassle under the new laws, but that few people who could have filed bankruptcy under the old law are prohibited from filing under the new law.

Still, those 500,000 people who rushed to file on the eve of the change depleted the pool of those who might have filed in 2006.

States reporting first-quarter filings universally show a significant decline compared to the first quarter of 2005. But when those statistics are broken down further, it seems clear that consumer bankruptcy is once again on the rise.

The bankruptcy rate in Utah, for instance, saw 1,015 consumer bankruptcy petitions filed during the first quarter of 2006, compared to 4,861 during the same period last year. But the bankruptcy filings break down like this: 233 in January, 311 in February, 471 in March.

Likewise, Iowa reported only 437 filings in March-significantly lower than its October peak of 5,404, but a substantial increase over the fewer than 100 petitions filed in the state in November. Minnesota's numbers have climbed from 282 filings in January to 611 in March.

Across the country, the trend seems to be the same: more people filing bankruptcy.

As the impact of the rush of October 2005 filings drops off and consumers become aware that the same basic filing bankruptcy rights they had before the law change are still available to them, the numbers climb--and it becomes increasingly difficult to see what the statutory reform has accomplished except to make the process more complex and expensive.


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