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Bankruptcies receding

(CATHRYN CUNNINGHAM/JOURNAL)
(CATHRYN CUNNINGHAM/JOURNAL)
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Bankruptcy filings fell in New Mexico for the second straight year in 2012, a trend that appears to run counter to the state’s sluggish economy, sketchy job picture and high home-foreclosure rate.

“Apparently, the science behind filings is beyond these particular factors,” said Albuquerque bankruptcy lawyer Ron Holmes.

The 15 percent drop in filings, from 5,674 in 2011 to 4,811 in 2012 — roughly the same level of filings as 20 years ago — follows a 14 percent drop in 2011, according to the U.S. Bankruptcy Court clerk’s office in Albuquerque.

Last year’s 15 percent decrease in New Mexico is in line with a 14 percent drop in filings reported nationwide by Kansas City-based Epiq Systems. All but one of the 90 bankruptcy courts in the country saw an over-the-year decline in filings during the 12 months that ended Sept. 30.

The two-year downward trend can be baffling, especially since a job loss is one of the major reasons — others include divorce, death of a spouse and medical emergency — why consumers file for bankruptcy court protection.

When New Mexico averaged 9,500 bankruptcy filings a year between 2002-04, job growth was around 2 percent and the unemployment rate hovered between 5 percent and 6 percent. Home values were on the rise, thus putting the brakes on foreclosure activity.

The all-time record year for filings, both in New Mexico and around the country, was 2005, when 12,424 petitions of all types were filed in the state. The state’s economy was in high gear and the housing market saw both record existing home sales and record home construction.

The lack of a clear correlation between bankruptcy filings and job growth, unemployment and foreclosures lends credence to the argument that bankruptcies rise and fall with the availability of consumer credit — a term that equates to consumer debt.

Most consumer bankruptcies involve a pile of credit card debt, which often is incurred to pay living expenses after a job loss, divorce or other upheaval, said Norman H. Meyer Jr., clerk of the Bankruptcy Court in New Mexico.

“It’s a symptom, not the cause,” he said.

The credit crunch hit in the fall of 2008, after the collapse of Lehman Brothers, leading to an unprecedented 16 percent drop in revolving consumer credit, which is basically credit card debt, in 2009-10, according to the Federal Reserve. Revolving credit has remained subdued since then.

“Credit has become less available, therefore people are not as able or likely to amass the amount of debt that was the norm five years ago,” said Albuquerque bankruptcy lawyer Shay Meagle, who chairs the bankruptcy section of the State Bar of New Mexico.

“It’s better underwriting by credit-card companies,” Albuquerque bankruptcy lawyer Jerry Velarde said about the drop. “Credit can be like candy with children. Give it to some and they’ll eat it up. Deny it and they’ll just move on.”

Mortgage lending has also tightened, going from what has been described as reckless lending during the housing bubble of the mid-2000s to a restrictive approach that has made it comparatively hard to qualify for a home loan.

The Consumer Financial Protection Bureau, a federal agency, recently proposed an “ability-to-pay” rule to set up a framework to match potential home buyers with mortgages they can afford. The rule is widely viewed as an attempt to find a middle ground between lax and tight mortgage lending.

While too much debt is a common denominator in bankruptcies, it’s actually the effort by the lender or creditor to collect on the bad debt that triggers the filing of a petition.

Debt collection typically begins with letters and phone calls and, if those initial efforts fail, ends in state District Court with a default judgment to garnish wages. Wage garnishment, which allows for deductions from the consumer’s paycheck to repay the debt, is often the last straw that leads to bankruptcy.

Meagle said she has seen a general shift in debt collection to a softer approach that involves negotiating with the consumer, thus short-circuiting a consumer’s need to file bankruptcy.

“I am seeing fewer lawsuits filed by credit card companies or their collection agencies, and more offers to their customers for reasonable settlements,” she said. “Much of this is due to the poor economy and the inability of the debtors to pay the debts, even if there is a judgment.”

The softer approach to debt collection is also pragmatic. If an aggressive lender or creditor drives the debtor into bankruptcy, then chances are the lender or creditor will have little to show for their collection efforts other than legal fees, she said.

“Right now there seems to be a good balance between protecting banks and other creditors, while being reasonable and flexible with their customers,” Meagle said.

The torrent of bankruptcy filings in 2005 was blamed on a sweeping overhaul of bankruptcy law called the Bankruptcy Abuse Prevention and Consumer Protection Act, which went into effect Oct. 17, 2005.

“Pretty much anyone who was even considering filing bankruptcy did so before that date,” Meagle said.

Filings dropped to a trickle in 2006-07, then gradually built back up to the most recent high of 6,569 in 2010, which is still one-third below the level of 2002-04.

The Great Recession had officially ended by 2010, but New Mexico’s economy was still hemorrhaging more than 1,000 jobs a month. The state’s unemployment rate topped out at 8.8 percent in March of that year.

During the 2011-12 drop in filings to below the 5,000 mark, job growth was essentially flat and the unemployment rate dropped to 6.2 percent due primarily to unemployed workers dropping out of the labor force. The bottom line is that the job market has remained dismal statewide while bankruptcies dropped.

“The economy has been poor for a long enough time now that those affected most were unable to make it to this point,” Meagle said. “They bit the bullet and filed bankruptcy a few years ago.”

Foreclosure activity continued to decline in 2012, during which 9,403 homes were going through the process compared to 11,133 at the height of the foreclosure crisis in 2010, according to Irvine, Calif.-based RealtyTrac. Nonetheless, the 2012 pace of foreclosures was more than double what it was in 2008.

The federal court’s expectation for filings nationwide this year was changed from a 7 percent increase in April 2012 to a 7 percent drop in December, Meyer said.

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