The prolonged economic malaise has afflicted tens of thousands of New Mexico households by such measures as unemployment, underemployment and home foreclosures, but apparently not so much when it comes to financial insolvency.
Bankruptcies dropped statewide for the third straight year in 2013, a baffling trend that observers say likely arises from factors such as a generally tighter consumer-credit environment, weak consumer confidence and lingering effects of a major overhaul of bankruptcy law in 2005.
“The cause of the continued decline in filings is oft-debated amongst bankruptcy lawyers, but there’s no consensus at present, and there are likely many factors at work,” said Albuquerque bankruptcy lawyer Daniel White.
Petitions were filed for 4,330 bankruptcies of all types last year in New Mexico, a 10 percent drop from 4,810 in 2012. Nationwide, bankruptcy filings dropped 13 percent to 1.03 million over the same period, according to Kansas City, Kan.-based Epiq Systems.
The drop in filings should not be taken as a sign that economic distress is disappearing from society, said Albuquerque bankruptcy lawyer Dave Giddens.
“There is still a lot of pain out there,” he said.
Last year’s 10 percent drop follows decreases of 15 percent in 2012 and 14 percent in 2011, said Norman H. Meyer Jr., clerk of the Bankruptcy Court in New Mexico. Last year’s shrinking margin of decrease could indicate that bankruptcy filings may have hit bottom, he said.
Ironically, bankruptcy numbers hitting bottom could be a good sign for the future direction of the state’s economy. Bankruptcies tend to go up when the economy is good and drop when the economy is bad, Meyer said.
“Yes, it’s counterintuitive,” he added.
This counterintuitive direction of bankruptcy filings appears to be tied to consumer credit, or what is more accurately called consumer debt.
When the economy is good, lending is perceived as less risky and, as a result, credit is more readily available, or so the reasoning goes. Access to credit is what enables consumers to build up the kind of debt that can lead to bankruptcy.
“Other macroeconomic factors – e.g., unemployment – do not have a strong effect on bankruptcy filing rates,” writes University of Illinois at Urbana-Champaign law professor Robert Lawless on the creditslips.org website. “It’s all about consumer/household debt.”
Lehman Brothers collapse
Bankruptcy filings in New Mexico
2004 9,519
2005 12,424
2006 2,519
2007 3,402
2008 4,581
2009 6,129
2010 6,569
2011 5,674
2012 4,810
2013 4,330
Source: U.S. Bankruptcy Court Clerk’s Office
As tracked by the Federal Reserve, outstanding consumer credit can fluctuate from month to month but historically has gotten bigger with each passing year. That all changed with the credit crunch, triggered in late 2008 by the collapse of Lehman Brothers.
Revolving consumer credit, which is primarily credit-card debt, plunged by an unprecedented 16 percent in 2009-10 and has yet to recover. The $814.7 billion of revolving consumer credit as of September 2013 was roughly where it was in August 2005.
The sustained lull in credit-card debt, which is a common denominator in many consumer bankruptcy cases, likely results from reductions on both sides of the supply/demand equation, according to several members of the New Mexico State Bar’s bankruptcy section.
“I think it’s a consumer confidence thing,” said Las Cruces lawyer Trey Arvizu, the section’s chairman, about the reduced consumer demand for revolving credit.
The Great Recession affected more than just the net worth of many households; it affected their outlook. Uncertainty about their economic futures has made many consumers more conservative about taking on new debt and more focused about paying off old debt, Arvizu said.
At a recent luncheon meeting of the bankruptcy section, Albuquerque lawyer Edward Mazel commented along the same line.
“When there’s a lot of money in the economy, people are more adventurous with their money,” he said. “They’re starting businesses and taking risks.”
Consumer confidence has bounced up and down for the past three years, influenced in no small part by the political gridlock in Washington, D.C., according to an analysis by Richard T. Curtin, director of Surveys of Consumers at the University of Michigan. This has contributed to the economic stagnation.
The Thomson Reuters/University of Michigan Index of Consumer Sentiment averaged 79.2 during the first six months of 2013, an improvement over the index average of 67.3 from 2008-11 but still short of the pre-recession average of 89 from 2001-07. The index topped 100 in the dot-com bubble years of the late 1990s.
On the supply side of revolving credit, the post-Lehman Brothers credit crunch took a couple years before bankruptcy statistics showed a negative influence on filings. In effect, the credit crunch prevented people from trying to borrow their way out of personal financial crises, which puts them at risk of bankruptcy.
“We used to see $50,000-$60,000 in credit-card debt,” said Albuquerque bankruptcy lawyer Jerry Velarde. “We don’t see that any more.”
Chapter 11 filings down
Credit availability appears to play a role in a sharp drop in Chapter 11 filings, which involve business reorganizations by corporations and high net-worth individuals. An attempt is made to repay some or all of the outstanding debt in a Chapter 11.
There were 34 Chapter 11 petitions filed in New Mexico in 2013, down 29 percent from 48 in 2012 and the lowest number since 34 were filed in 2008, according to Bankruptcy Court data. Nationwide, the year-over-year drop in Chapter 11 filings is expected to be around 10 percent.
Citing a Bloomberg analysis of Chapter 11s nationwide, White said the drop appears to stem from “banks being more willing to take some risks lending to corporations which are insolvent or nearly insolvent.” Another factor might be businesses taking a conservative approach to debt during the recession, he said.
The world of bankruptcy was turned on its head in 2005 by the Bankruptcy Abuse Prevention and Consumer Protection Act, a major overhaul of the bankruptcy code that went into effect in October 2005.
Filings soared in New Mexico to an all-time high of 12,424 in 2005, with virtually all of the cases coming in the 9½-month run-up to the new act’s implementation. In 2006, filings plunged to what was then a 20-year low of 2,519, according to bankruptcy court records.
Several bankruptcy lawyers said the 2005 act likely has discouraged some potential filers of bankruptcy because it made the process more complicated and more expensive.
A 2013 study for the American Bankruptcy Institute shows the average legal fee for a consumer Chapter 7 liquidation in New Mexico increased by $80, or 14 percent, to $651 virtually overnight when the act was implemented in 2005.
“When you’re broke, it can be hard to pay any additional amount, even if it’ll help you in the long run,” White said.
In addition, some lawyers believe the 2005 spike in filings cleaned out the pool of potential bankruptcy filers for several years. Now the 2005 filers of Chapter 7 bankruptcies are eligible to file again.
“I’ll be curious to see if we start getting repeat filers from those who filed in 2005,” Giddens said.