Lehigh University
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Falling Bankruptcies Not Evidence of Economic Strength

Consumer bankruptcy filings are down, but the decline is not an indication the economy has stabilized, said Yung-Yu Ma, assistant professor of finance at Lehigh University.

Last month, personal filings were 19.6 percent below levels one year ago and down for the fourth-straight month, according to the American Bankruptcy Institute, citing tightened consumer spending and declines in consumer credit use.

“The decline, while welcome, is only of modest comfort to indicate that the economy has stabilized,” said Ma, an expert in financial distress and bankruptcy. “A lot of people are clearly under a lot of economic stress. Unemployment remains high and job growth is modest at best.”

He points to three pillars that have led to the reduction in bankruptcy filings: “economic conditions have stabilized (albeit at a low level), banks have been tight with credit (since the financial crisis) and consumers have boosted their savings rate.”

It’s important to note, Ma said, that personal bankruptcy filings are more of a lagging indicator of economic strength. “For example, if someone loses a job, you can expect that he will struggle with bills and debt for a while, and look for a new job while collecting unemployment insurance,” Ma said. “A bankruptcy filing would typically come some time after the initial shock of the job loss.”

Typically, following a recession, job growth is much more robust, he said. “A lot of political discussion is focused on ‘job creation’ as it if happens in a vacuum. Long-term we need a skilled and well-trained workforce, a regulatory environment that does not impose excessive costs on businesses and a credit environment in which entrepreneurial activities are funded at levels commensurate with their risk,” Ma said.

Story by Sally Gilotti

Posted on Tuesday, November 08, 2011

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