Arizona Bankruptcy Legislation and Trends

By Lora Mwaniki-Lyman
Research Economist and Data Manager

Introduction

Individuals and business owners may at some point in life be faced with the challenge of overburdening debt due to changes in economic environment, lifestyle, and unforeseeable events.  While most may work their way out of their debt problem by tightening their belts, seeking credit counseling or debt restructuring, some may decide to file for bankruptcy.  The United States Bankruptcy Code provides individuals and businesses with a legal process through which a bankruptcy case may be filed.

There are 90 bankruptcy divisions in the country each with its own court. Arizona has three Bankruptcy Courts: Phoenix, Tucson, and Yuma. The Phoenix Court serves Apache, Coconino, Gila, Maricopa, Navajo and Yavapai counties; the Tucson Court serves Cochise, Graham, Greenlee, Pima, Pinal and Santa Cruz counties, and the Yuma Court serves La Paz, Mohave and Yuma counties.

Individuals and businesses may file bankruptcy through one of six bankruptcy cases provided under the Bankruptcy Code. These cases are named according to the chapters that describe them. In general: Chapter 7 provides for the liquidation of debtors’ nonexempt assets and distribution of proceeds to creditors; Chapter 13 facilitates adjustment of individual debt; Chapter 11 provides corporate and partnerships with the option to reorganize; Chapter 12 provides family farmers and fishermen  with adjustment of debt; Chapter 9 provides for the reorganization of municipality; and Chapter 15 is a new chapter added to the Bankruptcy Code by the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005. The chapter provides a process by which liquidation cases involving debtors and creditors across borders can effectively be handled. Go to www.uscourts.gov for details on each chapter of the Bankruptcy Code.

While the Bankruptcy Code has been amended several times, it is the most recently enacted Bankruptcy Abuse Prevention and Consumer Protection Act that has had a significant effect on the number of individuals and businesses filing for bankruptcy.

Bankruptcy Abuse Prevention and Consumer Protection Act

The Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA) signed into law on April 20, 2005, took effect on October 17, 2005. BAPCPA largely affects consumer bankruptcy but also includes provisions affecting farmers, small businesses, and corporations. The act makes it more difficult for consumers to declare bankruptcy under Chapter 7 (liquidation) and forces them instead to file for Chapter 13 (adjustment of debt) while reducing the abuse and fraudulent use of the bankruptcy system.

New changes in the bankruptcy system brought about by BAPCPA include the use of a means test (applied to filers whose gross income six months prior to filing is above the median of the state) to determine eligibility for filing under Chapter 7. Other changes brought by the new act include additional requirements such as mandatory counseling, additional filing requirements and fees, limited household exemptions, increased debt repayments under Chapter 13, and eight instead of six years discharge of a Chapter 7 filing after prior Chapter 7 case, among others.

Graph 1: Arizona Bankruptcy Monthly Filings (fourth quarter 2004 to second quarter 2009)

Effects of BAPCPA

The anticipated effects of the act resulted in a historic rush to file for bankruptcy, especially Chapter 7. Total bankruptcy filings in Arizona for the month of October 2005 reached a record 11,132 compared to 2,446 for the same month the previous year; an increase of over 355%. Over 93% of the October filings were Chapter 7 ( see Graph 1).  A dismal amount of 184 bankruptcies in total were filed in November and 248 in December 2005.

The composition of types of cases filed has also changed slightly after the enactment of BAPCPA.  From 1984 to 2004, on average 78.2% cases filed in Arizona were Chapter 7 compared to 80.0% for 2006 to current (see Graph 2).

Graph 2: Arizona Business and Non-Business Bankruptcy Filings (fourth quarter 2004 to second quarter 2009)

 

 

 

While BAPCPA made it more difficult for individuals to file for Chapter 7, it did not seem to have a significant effect on corporations and partnerships. According to the most recent released quarterly data, the 423 total business filings under Chapter 7, 11, and 13 for the second quarter of 2009 are above the 142 record high filings of the fourth quarter of 2005 when BAPCPA was enacted. The 8,646 total non-business (individual) filings for Chapter 7, 11, and 13 for the second quarter of 2009 are still well below the 11,505 record peak filings for the fourth quarter of 2005.

Businesses are also commanding a larger share of total bankruptcies filed than individuals. The share of businesses filing for all types of bankruptcies to total filings in Arizona increased from 1.5% in the fourth quarter of 2005 to 4.7% in the second quarter of 2009 (see Graph 3). The increase in the ratio of businesses to total choosing to file for bankruptcy (especially Chapter 7 and 11) since their peak in the fourth quarter of 2005 can be attributed to the slowing economy and consumers cutting back on discretionary spending to deal with the increase in gas prices, weak housing market, inflation, and steep job loss; hence spending less in restaurants and retail stores. Businesses most affected include automobile sales, hotels, restaurants, stores selling household durables, and some specialty stores.

Graph 3: Share of Business and Non-Business Filing for Bankruptcy (fourth quarter 2004 to second quarter 2009)

Arizona Bankruptcies on the Rise

While the BAPCPA resulted in a decrease in bankruptcies filed, the now ended housing market and financial crisis led recession have seen a steady increase in bankruptcy filings over the past three years.

According to the most recent monthly District of Arizona bankruptcy report for April, 3,974 total filings were reported in Arizona, 84.2% of which were Chapter 7 (liquidation) filings. The 13,316 bankruptcy cases filed in Arizona between January and April of 2010 already surpass the 9,190 bankruptcies filed for the same period in 2009.

The Phoenix Bankruptcy Court lead Arizona’s other two Bankruptcy Courts, Tucson and Yuma, in bankruptcy filings reported(see Graph belo). 2,496 bankruptcy cases were filed in Phoenix, 627 in Tucson and 219 in Yuma for the month of October. Phoenix reported the largest year-over-year increase in October of 60.8%, followed by Yuma and Tucson at 75.2% and 41.9% respectively. Chapter 7 filings in Phoenix increased by 60.81% for the same period (see Graph 4).

Phoenix is one of the metro areas in the United States that has been hardest hit by the housing crisis. The Phoenix metro area was ranked eighth in year-end foreclosures for 2009 with one in every 12 households facing foreclosure according to RealtyTrac Inc. RealtyTrac Inc. publishes the largest and most comprehensive database of properties in foreclosure and bank repossessions (Source: www.realtytrac.com accessed 05/12/10).  This was an improvement from the Phoenix metro area’s ranking as having the 5th highest foreclosure rating in 2008. Arizona was ranked third in foreclosures in March 2010 with one in every 144 households facing foreclosure or repossession.

Graph 4: Bankruptcy Filings in Phoenix, Tucson, and Yuma (January 2006 to April 2010)

In addition, the Standard and Poor’s/Case-Shiller Home Price Index reported by Standard and Poor showed home prices in Phoenix as having reached bottom in May 2009. The Phoenix home price index showed an over-the-month decrease of 1.5 percent in February 2010 and is still below its level compared to February last year with an over-the-year decline of 1.6 percent.

We should expect bankruptcy cases filed in Arizona to peak as the housing market continues to improve and the economy picks up.

 

For additional information, please contact the Economic and Business Research Center.

 

 

 

 

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