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Fewer Consumer Bankruptcies in 2011

Some good news for consumers: 1.4 million bankruptcies were filed in 2011, according to Epiq Systems. While that may seem like a lot, that number is down a full 12 percent from 2010. While certainly heartening for those struggling with their finances, it does not necessarily indicate that the economy is vastly improved or fully recovered from the Great Recession.

Most filings in 2011 - 70 percent - were Chapter 7 bankruptcy filings. Chapter 7 is often called liquidation bankruptcy because a debtor can have his or her obligations discharged (i.e. erased) after completion of the bankruptcy. Unsecured debt, such as medical bills and credit card debt will be discharged and creditors can no longer seek payment for the debt. However, non-exempt assets (assets not protected by state or federal law) can be sold in Chapter 7 bankruptcy to pay off creditors according to the bankruptcy plan. In order to file Chapter 7 bankruptcy, the filer must pass the means test, which means he or she must fall below a certain level of income and assets in order to file.

Chapter 13 bankruptcy, on the other hand, uses a payment plan to pay back creditors over a period of three to five years. The benefit of Chapter 13, however, is that the filer is able to keep his or her assets, including the home. It is also easier to qualify for Chapter 13 bankruptcy.

A professor at the University of Illinois College of Law indicated that often lower consumer bankruptcies are a reflection on people's access to credit. If a consumer can pay bills by obtaining credit, whether through personal loans or credit cards, they will do so. Only once credit dries up do people realize bankruptcy is their best option.

Professor Lawless suspects that bankruptcies will also decline in 2012, but only time will fully tell if the lowering trend continues.

Source: The New York Times, "Bankruptcy Filings Declined in 2011," Ann Carrns, January 12, 2012

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