According to a report released today by the American Bankruptcy Institute (ABI), there have been counted 1.046 million personal bankruptcies since the start of 2009. This is the highest since the first nine months of 2005 when people were rushing to file before the draconian new bankruptcy act of 2005 took effect (still better than the Victorian days of debtor prisons, but not much).
The institute expects to see the total for the year top 1.4 million. I think they are being conservative, especially given the rise in the unemployed, particularly the long-term unemployed. In September, there were 124,709 consumer bankruptcies, up 41% from a year ago. The graph below (from http://www.calculatedriskblog.com/) shows the history of bankruptcy filings since 1996 by quarter. The third quarter numbers come from the monthly ABI numbers; the quarterly numbers are from the administrative office of the U.S. courts.
If there is any good news in the report, it looks like the rate of increase in the third quarter was much slower than that of the second quarter. However, we are almost back up to the levels we saw under the old bankruptcy act, which was probably a bit on the “too-forgiving” side.
Increased unemployment, particularly long-term unemployment, is going to put pressure on this number to continue rising. Before people file, they will probably max out their credit cards, resulting in large losses to the big credit-card-oriented banks like Capital One (COF – Analyst Report) and American Express (AXP – Analyst Report).
People’s primary houses are not protected under the bankruptcy act (although second homes and yachts are), so filing for bankruptcy does not really offer that much relief to people who are forced to file, but at least it provides some. Judges can adjust the terms of loans (including interest rate and principal) on yachts and beach houses, but they are specifically forbidden by federal law from doing so on owner-occupied houses. A majority of the U.S. Senate (including 13 Democrats) think there is nothing wrong with that.
The biggest single cause of personal bankruptcy is medical bills, and for many if not most, these are people who have insurance. There is a common misperception that people without insurance can simply go to the emergency room to get treated. They can, but that does not mean it is free to them. The hospital can and will bill you, and turn over the bill to collection agencies to hound you if you don’t pay up. Yes, you will live, but you will live in a financial hell.
Serious health care reform would probably be the biggest single step towards reducing the number of bankruptcies in this country. Well, maybe getting unemployment back down would help more, but that is not going to happen anytime soon (link to my UE post). The same Senators who love the idea of rich people being able to hold on to their ski chalets when they run into financial difficulty, but not letting someone who only owns a modest home they have been living in for years, and who get sick stay in their homes, are the ones who are doing everything they can to undermine health care reform.