October 29, 2012

By Cornelius Frolik

A decline in personal bankruptcy filings in the Miami Valley signals that access to credit remains tight and consumers are carrying less debt, experts said.

But the trend is not necessarily good news.

Bankruptcy is a way of discharging debt, but many debtors are unemployed, meaning they do not have wages that creditors can seek to garnish. Debtors do not need to file for bankruptcy protection if creditors are unable to collect.

Bankruptcy filings will increase when more Ohioans get back to work, and debtors want to protect their wages from seizure, according to professionals who work with bankruptcy issues. Filings will also increase when the credit market thaws and people are more willing to take financial risks and shoulder higher levels of debt.

“Fewer people are working right now, so you aren’t going to have as many wage garnishments if there aren’t that many wages,” said Russ Cope, a bankruptcy attorney with Cope Law Offices LLC in Centerville. “There is no point filing bankruptcy unless you absolutely need to, and right now, many people are uncollectable.”

In the first half of 2012, personal bankruptcy filings fell 13 percent to 3,265 in the Dayton division of the U.S. Bankruptcy Court for the Southern District of Ohio. The Dayton division covers Champaign, Clark, Clinton, Darke, Miami, Montgomery, Shelby, Preble and Warren counties.

Between 2006 and 2010, filings for Chapter 7 and 13 bankruptcy proceedings in this region rose during the first six months of each year.

Filings fell last year for the first time since 2006, the year after there was a surge of filings connected to changes in bankruptcy law. Filings still remain far below pre-recession levels.

The top driver of bankruptcy is debt, but when the economy soured, access to credit tightened and consumers had fewer opportunities to take on large debt loads, reducing the incentive for people to declare bankruptcy, said Jean Braucher, a professor at the University of Arizona and vice president of the National Consumer Bankruptcy Rights Center. Consumer confidence also waned during the recession, and even consumers with access to credit were more cautious about using it, she said.

“Oddly, bankruptcy goes up when the economy is doing well and people are spending freely on credit,” Braucher said. “People can then suffer reverses, such as job loss or divorce or uninsured illness, but once they recover from the setback, they can use bankruptcy to shed debt they took on during a bad patch.”

Moody’s Analytics data show that U.S. families have cut debt loads down to pre-recession levels, and consumer loan default rates continue to fall, according to a report in the Los Angeles Times. In Ohio, about 0.64 percent of credit card owners were 90 or more days delinquent on their bills in the second quarter of this year, about half of the delinquency rate from the same period in 2009, according to TransUnion, one of the nation’s largest consumer credit reporting companies.

But another reason fewer people are filing for bankruptcy is many people are unemployed and lack wages that creditors can try to garnish, Cope said. Fear of garnishment is a common motivation for filing for bankruptcy.

“I think that most (bankruptcy) clients are concerned that if they do not file for bankruptcy, their wages will soon get garnished,” he said.

Creditors often sue debtors in court to try to force people to pay back the money they owe. They can force repayment by obtaining a money judgment. Thousands of these cases are filed in municipal and county courts in the region each year. In Dayton Municipal Court, there were 3,773 civil lawsuits filed in 2011 that asked for money judgments against another party, and about 2,984 of these cases resulted in a judgment. Other area courts reported increases in judgments during the recession.

If creditors obtain a judgment, they can file for a garnishment. Wage garnishments require employers to withhold as much as 25 percent of a worker’s earnings for repayment of his or her debt. Non-wage garnishments allow creditors through the court system to seize a portion of the funds in the debtor’s bank account.

For many people, bankruptcy is the only way to stop the garnishment process, said David Smith, a bankruptcy attorney with Wright & Schulte LLC in Vandalia.

Once a creditor obtains a garnishment, they have little to no incentive to work out a payment plan with a debtor, because they are guaranteed their money and interest, Smith said.

“Unless the debtor can pay off the balance owed in full or settle the account in some manner, bankruptcy is the only other option the debtor has in order to stop the wage garnishment,” Smith said. “Avoiding and/or stopping wage garnishments is a big reason a lot of people file bankruptcy.”

People can contest motions for judgment in court or make a payment after a judgment is issued to avoid having their pay seized, but it is extremely difficult to fight a garnishment once it is put in place, said Linda Cook, a senior staff attorney with the Ohio Poverty Law Center.

The problem is many people do not respond to civil summons and other legal documents related to the civil lawsuits filed by creditors or third-party collection agencies, she said.

As a result, the creditors win their judgments by default. Court costs and interest are added to the total cost of the judgment.

“No creditor can garnish wages without first getting a judgment and then initiating the proceedings to start the garnishment process,” Cook said. “But for whatever reason, a lot of consumers do not respond to collection lawsuits, and so it is largely a default business.”

About one in 10 Americans have debt under collection, and a growing number of consumers are being sued by creditors in some local courts, court records show.

Smith said many people ignore creditors until they have their wages garnished, and then they seek bankruptcy relief. But he said filing for bankruptcy is not a “quick fix,” and the decision has consequences, including damaging consumers’ credit.

Smith recommends debtors contact their creditors to see if they can work out a payment arrangement instead of seeking legal action. He said people ignore unpaid bills and loans at their expense.

“Simply doing nothing is not going to help things out at all,” he said.

Steve Katchman, a debt collection attorney in Dayton who represents creditors, said he is usually willing to work out a payment plan with debtors before garnishment if they are ready to pay reasonable amounts. He said creditors want repaid, but they understand consumers might need some flexible repayment terms.

“These are people, so I am sensitive to their economic situations, and so are my clients,” he said.


2007 2008 2009 2010 2011 2012

2,909 3,275 4,089 4,349 3,735 3,265

SOURCE: U.S. Bankruptcy Court for the Southern District of Ohio

Note: Filings are from January to June each year and include Champaign, Clark, Clinton, Darke, Miami, Montgomery, Preble, Shelby and Warren counties.