Personal bankruptcies in Western Pennsylvania and across the nation have been falling for the past four years, a lull that might reflect a tightening of the rules governing how often individuals can file or how much banks have been willing to lend, rather than simply a sign of improving financial conditions.
Total bankruptcies filed in the U.S. Bankruptcy Court of the Western District of Pennsylvania dropped 49 percent over the four-year period from 2009 to 2013, sliding from 10,310 bankruptcies in 2009 to 5,235 in 2013. For the first six months of this year, there have been 3,870 filings vs. 4,156 during the same period last year, a 7 percent drop.
The Western District of Pennsylvania includes Pittsburgh, Johnstown and Erie.
Nationwide, bankruptcy filings are down 14 percent from 1.04 million during the 12 months ending March 2014 versus 1.2 million bankruptcy filings for the same time frame in 2009.
“Bankruptcy filings continue to dive as business borrowers enjoy sustained low interest rates and consumers remain committed to shedding debt,” said Samuel Gerdano, executive director of the American Bankruptcy Institute in Alexandria, Va.
The general cause of someone seeking bankruptcy protection from creditors is a heavy debt burden combined with a loss of income related to unemployment, divorce or uncovered medical bills. Chapter 7 wipes out debt, but can only be used once every eight years.
With 3 million people having been out of work six months or longer and Bureau of Labor Statistics’s June report showing the percentage of the working-age population in the labor force at its lowest level since the 1970s, the drop in bankruptcy filings could be temporary as those people could just be waiting for the right time to file.
Bankruptcy filings exploded nationwide in 2005 as many people with troubled finances rushed to file before the new law would push more of them out of Chapter 7, which wipes away debt, to Chapter 13, which forces filers to arrange a payment plan to satisfy debtors over a three- to five-year period.
Many people who filed right before the 2005 deadline may not have been eligible to do so again until recently.
But one Pittsburgh bankruptcy attorney, Matthew Herron of Debt Doctors, Downtown, has a different idea on why the local and national figures are down. He believes bankruptcies rise and fall based on lending regulations.
“My clients beat themselves up, and it’s terrible to see them beat themselves up over something that is not 100 percent their fault,” Mr. Herron said. “If you really need a car and you can only get credit at 20 percent interest, the bank knows and you know there’s a high likelihood that you are going to default on that. But you need a car to get to work.”
Following the financial crisis in 2008, financial institutions for a period of time hoarded cash and did not lend money easily, which he thinks is why bankruptcies have been in a downtrend since then and supports his idea that banks control bankruptcy filings more than debtor behavior.
“We tend to think the people who file for bankruptcy are irresponsible or they are the cause of all their problems,” he said. “But people filing for bankruptcy is just part of doing business for banks. The banks understand these numbers, and they know if they wanted to bring bankruptcy number down to almost zero, they could stop bankruptcies almost completely.”
Banks tightened their lending requirements in 2009 through 2011. “Around midyear 2011, lenders started to loosen up a bit,” Mr. Herron said. “We’ll see in 2015 to 2017 the numbers will probably start to go up.”
Greg Womack, president of Womack Investment Advisers in Edmond, Okla., said he thinks the decline in bankruptcies has a lot to do with families improving their household balance sheets and the overall improving economy since 2009.
“People get overextended when times are good,” Mr. Womack said. “Then when the party ends, they have all this debt.”
Mr. Womack also pointed out that laws related to inherited individual retirement accounts and bankruptcy have changed. Over the years, federal court decisions have been divided over whether inherited IRAs are protected under the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005.
The Supreme Court in June decided that if someone declares bankruptcy and holds an inherited IRA, they will not receive any protection for those assets under federal law. Noninherited IRAs owned by the bankruptcy filer are still protected. Also, IRAs that are inherited from a deceased spouse will continue to be protected in bankruptcy filings.
Commercial bankruptcy filings have fallen even more dramatically than personal bankruptcies.
Total commercial bankruptcies fell 36 percent from March 2009 to March 2014, according to U.S. Bankruptcy Court records. While companies can and do fall on hard times, businesses have more option available for avoiding the bankruptcy process.
“The declining bankruptcy filings is something that has been consistently of interest to me as a bankruptcy attorney,” said Michael Shiner, a shareholder at the Tucker Arensberg law firm, Downtown. Mr. Shiner focuses on commercial bankruptcy.
“In many ways, this used to be a country that encouraged risk-taking for businesses,” he said. “You could always file a Chapter 7 bankruptcy and get a fresh start if the business failed.
“In 2005, the bankruptcy code changed to force anyone above the median income [in their home state] to file a Chapter 13 and repay all their debt. Chapter 13 is a lot more difficult and it has resulted in a decline in company bankruptcy filings.”
Another major factor is the high cost of filing a corporate bankruptcy, he said. Companies find it is often less expensive to sell the business or refinance their debt with a new lender at a discounted amount.
“Extremely low interest rates have reduced the pressure on businesses,” Mr. Shiner said. “There is a lot of competition among banks for commercial loans. If a company runs into debt with one bank they can often borrow from another bank [to straighten things out]. On the business side, one lender’s problem is the next lender’s new customer.”
Tim Grant: email@example.com or 412-263-1591.