Bankruptcy Filings are Down, but Housing Pains Continue...

Consumer bankruptcies fell 17 percent to 108,517 in September from 130,329 a year earlier and are down 10 percent for the first nine months of the year, according to American Bankruptcy Institute's recent report, which is based on data from the National Bankruptcy Research Center.    This should be welcome news, but it ignores an inconvenient truth.  After several years of protracted recession and unemployment, bankruptcies are likely to slow down because many who need to file bankruptcy already have.  

In real life, the fact that bankruptcies are slowing does not help much.  Indeed, the housing market and the foreclosure situation are probably getting worse.  California had a 55 percent month-over-month increase in default notices from July to August, giving the state the second highest foreclosure rate in the United States, behind Nevada and slightly higher than Arizona, according to RealtyTrac's U.S. Foreclosure Market Report, released last month.   Moreover, the ongoing scandal of "robo-signed" foreclosure documents - and the government and regulatory investigation of lender practices - have probably led to an outsize backlog of shadow-inventory foreclosure properties which will eventually have to be marketed, further depressing housing prices.

From our own experience, we know that many homeowners will file bankruptcy once they find out what their lender is going to do - i.e., when the loan modification is approved or denied - or the lender reneges on the "trial" modification.  If the mortgage modification process is ever streamlined to the point that it resembles a sensible business practice, we expect a large number of bankruptcies will follow from people who have been standing on the sidelines waiting to see whether they needed to file bankruptcy to discharge their other debts.   -honakerlegal