There has been much discussion lately about bankruptcy filing numbers and the recent decrease in filings. Although this comes as good  news, it does point out some contradictory evidence as well. A recent analysis of bankruptcy filing patterns reveals some interesting facts into factors that contribute to increases and decreases in filing numbers.

Historical Analysis

Taking a look back over the past decade in bankruptcy filings, there has been much variability in filing numbers. Chapter 7 filings hovered around 1,000,000 annually from 2001 to about 2004. A huge spike in filings was observed in 2005, followed by an even sharper decline in 2006. A similar pattern was observed in Chapter 13 cases, but filing numbers never broke 500,000 annually.

 So why the sudden increase and falloff of filings between 2005 and 2006? A deeper look into economic and legislative factors reveals their heavy influence. Although the economy was fairly stable between 2001 and 2004, there was a significant lending bubble for both mortgages and personal credit around these times. While debt default wasn't common back then, there were a fair number of individuals who sought bankruptcy during these times. In 2005, some important changes were made to bankruptcy laws that make qualifying for Chapter 7 more difficult. The changes were meant to prevent abuse of the system and eliminate those with the financial means of repaying their debts from obtaining a debt elimination discharge in Chapter 7. These legislative changes had a significant effect on filing patterns, hence the steep decline in filings in 2006.

Since these changes filings have continued to steadily rise to pre-2005 levels, showing a sharper increase around 2008. The recession hit around this time, in which more people found themselves in underwater mortgages and drowning in personal debts. Since 2008, the unemployment rate has skyrocketed and many people simply can't afford to repay their debts, which is evidenced by the filing pattern increase from 2008 to 2010. However, more recent analysis shows that filing patterns in 2011 have shown some promising signs of decrease.

Recent Analysis

While news of bankruptcy filings decreasing over the last year are promising signs, it is too soon to tell if this pattern is attributable to economic factors. The housing market continues to struggle and the economy has yet to pull itself up and out of a dark time, yet people are finding ways to manage their debts without filing for bankruptcy. Debt negotiations and creditor flexibility have afforded many people an opportunity to resolve their debts directly without the help of bankruptcy. Having more help directly from lenders is a factor that hasn't come into play in years past, but offers a glimmer of hope for 2012.