Bankruptcies Reached 1.5 Million in 2010

A total of 1.53 million people filed for bankruptcy protection in the U.S. in 2010, representing a rise of 9% from the previous year, according to data from the American Bankruptcy Institute and the National Bankruptcy Research Center.

The increase is widely blamed on steadily high unemployment rate and falling home prices. Homeowners were hit particularly hard as they struggled to keep up with mortgage payments and faced the risk of foreclosure.

Bankruptcies have reached their highest level since 2005, when bankruptcy rules were revamped under the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA).

The act, ironically, was meant to curb bankruptcies by making Chapter 13 bankruptcy repayment plans a more likely option for consumers. Prior to the change, many debtors would file for Chapter 7 bankruptcy as an easy way out of debt.

Nevertheless, the report revealed that over 60% of bankruptcy debtors still met Chapter 7 requirements. For instance, many of the filers had lost their jobs and were unable to earn enough for debt payments. Others were burdened underwater mortgages, or debts that were greater than their home was worth.

Some areas had a markedly higher rate of bankruptcies and accounted for a significant part of the increase, the report also showed, pointing to the Southwest states of California and Arizona as classic examples. Over the year, California's bankruptcies rose 25%, while Arizona saw a rise of 24%.

Fortunately, economic improvements are expected to mitigate bankruptcies in 2011. Better tax breaks, tighter borrowing (and thus a smaller possibility of defaulting), and job creation may keep more people out of bankruptcy for at least the first quarter.

 

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