By: Richard Metcalf
July 22, 2012
Bankruptcies still going down...for now
July 22--Bankruptcy filings continued to dwindle in New Mexico during the first six months of the year despite a sluggish economy and job picture that would seem conducive to financial distress.
Petitions were filed for 2,538 bankruptcies, down 18 percent from 3,094 filed during the first half of 2011, according to the clerk's office for U.S. Bankruptcy Court in Albuquerque. Bankruptcy filings have been sliding in the state since mid-2010.
"People ask me what I do for a living and I'll say I'm a bankruptcy attorney. They'll say, 'You must be very busy,' " said Ron Holmes of Albuquerque. "No, not really."
Nationwide, filings dropped 14 percent from 731,500 in the first half of 2011 to 632,130 in the same period this year, according to Kansas City, Kan.-based Epiq Systems and the Alexandria, Va.-based American Bankruptcy Institute.
Weak consumer spending was identified as one reason for the drop -- the rationale being that fewer consumers are spending themselves into financial insolvency.
After shrinking in 2008-09, consumer spending has generally been positive, although occasional lapses into negative territory continue, according to federal data. The Consumer Confidence Index, a barometer of the economy from the consumer viewpoint, is roughly one-third below its historic average.
"I think it's fear and selfpreservation," said Michael J. Caplan, a bankruptcy lawyer in Grants. "People don't know what to do. They can't predict the future, so they cut back on spending."
Bankruptcy filings have been hard to forecast for the past three years or so. The general outlook is currently for filings to remain down for the rest of this year.
"The Administrative Office of United States Courts is at this point predicting that filings will increase in 2013," said Norman H. Meyer Jr., clerk of the Bankruptcy Court in New Mexico.
N.M. rate 15th lowest
New Mexico's per capita rate of 2.5 bankruptcies per 1,000 residents was 15th lowest in the country during the first half of this year, the ABI reported. The state had the 15th lowest rate for all of 2011 as well.
The national per capita bank- ruptcy rate was 4.1 filings per 1,000 residents during the first half of the year.
The most common explanation for New Mexico's low bankruptcy rate is the state's high poverty level.
"Bankruptcy doesn't help people who don't have anything," said Albuquerque bankruptcy lawyer Bill Davis. "Bankruptcies are to protect assets. When it gets to the point where people don't have assets to protect, technically they don't need to file bankruptcy."
More than 20 percent of the state's population lived in poverty -- the official poverty level was an annual income of $22,314 for a family of four -- in 2010, according to the Census Bureau. A more recent report by the Corporation for Enterprise Development found that just short of half of all households in the state lack the savings to pay bills for three months if something bad happens.
Being poor doesn't stop debt collectors or prevent them from getting a court order to "garnish" wages, which basically means that the court gives debt collectors the authority to deduct money from a consumer's paycheck to pay a debt.
Many New Mexicans are so poor, taking home $290 or less a week in pay, that a court order to garnish wages is unenforceable, Caplan said. Consumers with that low of an income are typically called "judgment proof."
"They're still getting the phone calls (from debt collectors)," Caplan said. "They choose to ride it out."
Caplan, Davis and Holmes all said they turn away potential bankruptcy clients who don't meet the $290 threshold to justify a filing. Holmes noted that, as their financial circumstances improve and they are no longer judgment proof, a bankruptcy petition may become viable.
Muddled jobs picture
A job loss is among the most common personal misfortunes -- divorce and death of a spouse are also on the list -- that lead a consumer down the road to bankruptcy.
After nearly two-and-a-half years of job losses, New Mexico's employment picture turned positive in August 2011 with a tiny net gain in jobs. The smalls gains continued for the next eight months before turning negative again this May.
Yet the job picture remains muddled, said Albuquerque bankruptcy lawyer Alfred Sanchez. Many workers are underemployed, holding temporary jobs or eking out a marginal living in the underground economy where cash and barter rule, he said.
Debt, particularly unsecured credit card debt, builds as they attempt to make ends meet while hoping for something good on the horizon, he said. There's typically a lag of three to nine months, depending on savings and level of discomfort, between the personal misfortune and financial insolvency, he said.
Credit card debt, which is tracked as revolving credit by the Federal Reserve, shrank in 2009-10 and has remained relatively stagnant since then. The lack of movement in revolving credit has been attributed to tighter lending standards imposed since the so-called credit crunch of 2008.
Some bankruptcy experts have tied the current decline in consumer bankruptcy filings to the tighter lending standards. Their reasoning is that tighter standards prevent consumers from piling up the kind of crippling debt that leads to bankruptcy.
Hurdles to filing
Bankruptcy law itself contains some hurdles to filing, most notably in cost.
Lawyers have charged more for bankruptcies since the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, which made the process both more labor intensive and increased their accountability.
"A bankruptcy that cost $750 ten years ago is now $2,000," Davis said.
One upshot of the increased cost has been more consumers filing do-it-yourself bankruptcy petitions, which are officially called pro se petitions. Roughly one out of every 10 bankruptcies filed in New Mexico is pro se.
"The number is up, but not radically up -- maybe a 10 percent rise in pro se level over the past two years," Meyer said. "We're in line with national trends."
The 2005 act also increased significantly the kinds of debt that can't be discharged or wiped clean by a successful bankruptcy, Davis said. Traditionally, child support, student debt and taxes were among the handful of debts that could not be wiped off the record.
"That list has grown and grown," Davis said. "Now there are 19 paragraphs and multiple sub paragraphs of exceptions."