Bankruptcy filings drop 70% after changes in law

A year after a massive reworking of bankruptcy laws went into effect, the number of bankruptcy filings nationwide last year dropped to the lowest level in nearly 20 years, although experts said they might rise again this year.

The total number of bankruptcy filings last year dropped 70% to 618,000, down from a record of 2.1 million in 2005, when people were rushing to file before the new laws were put in place, according to statistics released Tuesday by the Administrative Office of the U.S. Courts.

Total bankruptcy filings were highest in the fourth quarter, according to the court statistics. Business filings dropped 50% to about 20,000. Personal filings dropped 71% to about 598,000.

The number of filings last year was the lowest since 1988, Alexandria, Va.-based American Bankruptcy Institute said.

Samuel Gerdano, the institute’s executive director, said the drop from 2005 was “almost entirely due to the aftereffect of the 2005 law changes.”

But as household debt levels remain high, “most expect consumer bankruptcies to bounce back by the end of this year,” he said.

Now that the reforms are in place, consumers have shifted away from filing under Chapter 7 of the U.S. Bankruptcy Code, which allows them to get rid of some debt, and toward Chapter 13, which allows them to pay some of their future earnings to creditors, the bankruptcy institute said.

This shift, the group said, was because of more stringent requirements for Chapter 7 filings.