Experts point to a variety of factors to account for the improvement, including tougher lending standards.
Bankruptcy filings have fallen in Minnesota and the rest of the United States for two straight years, reaching the lowest level since 2008.
Consumer bankruptcy filings in Minnesota fell 11.3 percent in fiscal 2012, which ended Sept. 30, according to data the Administrative Office of the U.S. Courts released Wednesday. Filings for bankruptcy fell 14 percent nationally over the same period.
In Minnesota, 17,666 people filed for bankruptcy on the year, fewest since 2008.
"It's an encouraging sign for the economy. It makes me think about getting into a different line of work," said Tim Theisen, a bankruptcy attorney in Anoka. "Three years ago, there were a lot more people that had really hit their rock bottom."
Theisen said banks have stricter lending standards than they did before the recession, which may help keep people out of bankruptcy proceedings.
One reason filings declined in 2011 and 2012 is that creditors have been less aggressive with debtors in the past two years, said Edward Morrison, a law professor at the University of Chicago who studies bankruptcy and the economy. States created obstacles for banks to foreclose on past-due homeowners after revelations of robo-signing in the fall of 2010. Robo-signing was a system in which banks created similar foreclosure documents for many homeowners but did not review them case by case.
"In 2010, 2011, there was a big slowdown in the foreclosure process," Morrison said. "Some states were actually taking steps to stop the foreclosure process until there was better documentation."
As fewer consumers faced imminent foreclosure, the likelihood of bankruptcy diminished. That may shift now that the nation's largest mortgage servicers settled with the states' attorneys general in early 2012, but homeowners are still sometimes able to stave off foreclosure long enough to reorganize finances.
Also, credit card companies write off more than half the debt they're owed, because there's no point pursuing debtors who have no wealth with which to pay back the debt, Morrison said. He calls this "informal bankruptcy." It still destroys a borrower's credit, but it never gets to bankruptcy court.
Maureen Thompson, legislative director for the National Association of Consumer Bankruptcy Attorneys, said the falling number of bankruptcy filings, in part, reflects that people in financial distress have less wealth than four or five years ago.
"If you have been out of work and you have no assets to protect, there's really no reason to apply for bankruptcy," she said. "Your wages aren't being garnished, your car isn't being repossessed, your house isn't threatened with foreclosure."
As the economy improves and people find jobs and start receiving a paycheck, bankruptcy filings might pick up, she said.
That may be counterintuitive, but as Morrison said, "the drivers of consumer bankruptcy are complex."
Adam Belz 612-673-4405