Personal bankruptcy filings nationwide are falling steadily this year. An 8.4 percent drop in filings this year compared to the first five months of 2010 has prompted the National Bankruptcy Research Center (NBKRC) to assert, “The worst is behind us.”
But that’s not the case in Delaware.
In four of the first five months of the year, more personal bankruptcy petitions were filed in Delaware than for the same period in 2010. Overall, January-May filings increased from 1,324 in 2010 to 1,471 this year, a jump of 10 percent.
The figures include filings under both Chapter 7, in which debtors forfeit their assets and debts are forgiven, and Chapter 13, in which debtors work out a repayment plan, a center spokesman said.
Nationally, bankruptcy filings have been rising steadily since 2006, the year after the federal Bankruptcy Code was revised to make it harder for consumers to shed their debts. Filings under the old law topped 2 million in 2005. Under the new law, they have climbed from nearly 600,000 in 2006 to 1.53 million in 2010.
Attorneys, economists and housing experts point to a stagnant unemployment rate and sagging home values as the key factors affecting bankruptcy filings.
- Click the image to view a comparison of 2010 and 2011 monthly personal bankruptcy filings in Delaware
To explain the surge in filings, John Stapleford, an economist with the Caesar Rodney Institute, said “the culprit appears to be underwater housing,” the term used to describe owing more on a mortgage than the value of the home.
The Zillow.com real estate website, Stapleford said, shows that sale price of single-family homes in Delaware has fallen 29 percent from its pre-recession peak, from $242,000 to $172,000, compared to an 18 percent drop in the Philadelphia metropolitan area. “While 29 percent is not as bad as Florida and Nevada, where the drop may be as much as 50 percent, it is still much higher than the Northeast,” he said.
Other 2010 data from NBKRC — showing Delaware rank 22nd among the states in per capita credit card debt and 42nd in automobile debt, but ninth in length of mortgage delinquencies (60 days) and 15th in rate of increase of bankruptcy filings — supports the assumption that housing woes have triggered the bankruptcy surge, he said.
Mortgage-payment issues are also contributing to bankruptcies among the unemployed and underemployed, according to attorney Eric Doroshow and Rashmi Rangan, executive director of the Delaware Community Reinvestment Action Council (DCRAC), an advocacy group that works to ensure equitable treatment and equal access to credit and capital for under-served populations and communities
“I’m seeing people who bought houses with mortgages that had low introductory teaser rates and they didn’t realize what would happen when those rates expired,” said Doroshow, a partner in Doroshow, Pasquale, Krawitz & Bhaya.
“Most homeowners who are behind on their payments first try to work it out on their own,” Rangan said. “When they find out they’re not getting anywhere, on the day of the sheriff’s sale, or the day before, they file for bankruptcy.”
Figures compiled by the Delaware State Housing Authority show a steady increase in foreclosure filings and sheriff sales. Foreclosures totaled 4,488 in 2008, 6,157 in 2009 and 6,457 last year. Sheriff sales have risen from 1,209 in 2008 to 1,327 in 2009 to 1,876 last year.
In New Castle County, the pace has shown no signs of slowing down, Sheriff Trinidad Navarro said.
There have already been sheriff sales on 616 properties this year, compared with 543 in the first six months of 2010.
Both Rangan and Douglas B. Canfield, executive director of the nonprofit Legal Services Corporation of Delaware Inc., said they’ve noticed no significant change in foreclosure filings and sheriff sale activity so far this year.
Canfield said that it’s not just the inability to make mortgage payments that has caused the increase in bankruptcy filings.
Since last November, the U.S. unemployment rate had been moving steadily downward, from 9.8 percent to 8.8 percent in March of this year, before kicking up to 9 percent in April. Delaware’s unemployment rate, which has been consistently lower than the national average for more than 20 years, has barely changed in the last year, ranging from a high of 8.5 percent to the low of 8.2 percent registered in April, the most recent month available.
Although unemployment numbers have remained relatively steady for the last year, workers in two normally well-paying employment sectors — financial services and manufacturing — have suffered major hits in the last few years. Employment in commercial banking dropped 2 to 3 percent last year and 9 percent in 2009 and there have been severe losses in manufacturing employment for the last five years, Canfield said.
When people suffer a loss of income, or lose jobs altogether, it takes time for the impact to be felt, and that’s why changes in the bankruptcy filing rate will trail changes in unemployment numbers, Canfield said. “If there’s an uptick in the economy, or you get a new job, you might not file for bankruptcy at all.”
However, the loss of health insurance coverage frequently follows the loss of a job, and it’s easy for one serious illness to put an unemployed, uninsured family on the edge of bankruptcy, Canfield said. “It doesn’t take long. A week in the hospital with no coverage could cost $25,000,” he said.
Canfield noted that it’s middle-class families facing financial crises caused by unemployment or underemployment, not the chronically poor, who are more likely to file for bankruptcy.
“For the really, really poor, bankruptcy is not going to help,” he said. “They’re not going to file for bankruptcy because they have no assets to protect.”
Doroshow also pointed to the character of the state’s residents to explain why Delaware’s bankruptcy filings had, until now, trailed most of the nation. “Delawareans are pretty conservative by nature. They’ll try to work things out,” he said.
What’s going on now, he explained, is “they’ve been holding off, holding off, holding off, hoping that things will improve, but none of the above is happening.”
In the last few months, he said, he had seen several clients who had come to him a year or two before to discuss the possibility of filing for bankruptcy but decided they would first try to work things out with their creditors.
One recent visitor to his office was a Sussex County man who lost his management job when the company he had worked for shut down. The man found another job, as a manager in a fast-food restaurant, but it doesn’t pay as much and he’s having trouble paying all his bills, Doroshow said.
“People are not rushing in to file,” he said. “That’s the way it should be.”
