Monday, August 15, 2011

Bankruptcy filings continue to fall in Athens area

Bankruptcy trends provide useful information but fuel much speculation. Does a drop in bankruptcy filings indicate the economy has improved or that most people who needed to file have already done so? Does it mean that people are finding better income to pay their debts or that they are just able to borrow more now that the credit freeze has thawed out?

Bankruptcy statistics in the U.S. Bankruptcy Court for the Middle District of Georgia (which includes Athens) show the number of filings continuing to drop since their recent peak in 2009. This trend cannot be easily observed on a daily basis since individual debtor attorneys like myself observe the short-term trends that follow seasons and even monthly payment cycles. However, comparing the first two quarters of this year still show a drop in comparison to the first two quarters of the previous two years.

Professor Bob Lawless of the University of Illinois explained on the Credit Slips blog that there is a relationship between total consumer debt and bankruptcy filings. ("Debt Causes Bankruptcy (But Sometimes in Counter-Intuitive Ways)".) Bankruptcies go up when the amount of consumer credit goes down and thus limits the options of borrowers. He also explained that bankruptcy is a lagging indicator and not a leading indicator. On an anecdotal level, I have indeed seen that some of my clients were pressured to investigate bankruptcy options when their credit card or home equity limits were dropped, and they often try to pursue various options for months or years before considering bankruptcy.

This June article from Reuters, "US consumer credit climbs in April for 7th month," observed that borrowing has increased but noted warnings that this increase is due to "tough economic times" rather than "an economic rebound." So the recent drop in bankruptcy filings does not really show an improvement in the economy, just an increase in the amount of credit available. (A rosier view is painted by Professor Ronald Mann of Columbia University on Fox Business.) Of course, there are many particular trends on a finer level of detail that affect bankruptcy filings overall, such as foreclosures, employment, income, and even changes in the rules that govern credit and bankruptcy.

All this means about bankruptcy statistics is that they are symptoms of economic changes but not a direct indicator of the health of the economy, at least on the shorter scale of comparing year to year. Over a period of years, however, they do seem to indicate the economic stress of the time period as long as they are considered in the context of the regulations and market trends of that period. (For instance, filings were pushed down in 2005 by new bankruptcy laws and pushed up in 2009 by the housing market crash.)

Monday, August 1, 2011

Debts which are dischargeable and nondischargeable

Most people who file for bankruptcy do so to get a discharge of their debts so they can start over financially. Debts fall into different categories under federal law which may or not be dischargeable. In many consumer cases, many debts are either clearly dischargeable or clearly not dischargeable, though some debts fall into gray areas.

The discharge order in a bankruptcy case does not specify which debts are being discharged. A dischargeable debt that was not challenged (e.g., a credit card balance) is presumed to be discharged, and a nondischargeable debt (e.g., a student loan) is presumed to remain collectible. A debt from any category can be challenged for dischargeability by the creditor for special reasons, sometimes after the bankruptcy case is closed. A debtor can also start a proceeding to determine the dischargeability of a debt in order to settle conflicts that may arise after the bankruptcy case.

The common types of debts that are discharged are:
  • Credit cards
  • Personal loans
  • Medical bills
  • Liability on repossessed cars and foreclosed houses
The common types of nondischargeable debts are:
  • Student loans
  • Taxes (but not all of them)
  • Child support or alimony
To help clear this up, the Bankruptcy Code lists only the exceptions to discharge. You only have to look up a type of debt to see if there is an exception but not to see if it is allowed. However, we run into gray areas when we are not sure whether the facts and circumstances of a debt will put it into one of these exceptions. And to make things more complicated again, a hardship discharge could be available for a nondischargeable debt (e.g., for a student loan for someone who has become permanently disabled).

A major exception to dischargeability is based on some kind of fraud. A creditor can challenge the dischargeability of a debt if it was incurred by false pretenses, a false representation, actual fraud, or a false written statement with certain conditions. It could also be challenged if it was incurred by fraud or defalcation while acting in a fiduciary capacity, embezzlement, or larceny. The first problem for the creditor making the challenge is deciding what type of fraud was involved and how the circumstances fit into all the necessary legal elements. The second problem is actually proving that all these elements (which may come from state law as well as federal law) are met.

If you choose to file for bankruptcy protection, be sure you understand which debts you are discharging, which debts you are not discharging, and if there are any risks of uncertainty.