Minnesota's number of bankruptcies is declining

With consumers paying off debts and lenders tightening borrowing standards, the number of Minnesotans resorting to bankruptcy is declining and is on pace to drop below 2009 levels.

Through the first six months of the year, bankruptcy filings in Minnesota are down 11.5 percent from the same period last year, according to figures from Epiq Systems, which compiles data for the American Bankruptcy Institute.

In Minneapolis, filings are down by 14 percent, to 4,539, according to the U.S. Bankruptcy Court. In St. Paul, filings declined by 10 percent, to 3,958.

The declines mirror a national trend, with filings across the country down by 14 percent this year.

Economists said the trend isn't necessarily a sign of an improving economy, although rising employment has helped some households pay the bills.

"Economists are calling it the 'balance sheet recession,'" said Louis Johnston, an economics professor at the College of St. Benedict and St. John's University in Collegeville, Minn.

Large numbers of consumers, even ones with strong incomes and good credit, Johnston said, are paying off their debts and "cleaning their sheets" at a rate not seen during previous economic recoveries.

While this translates to fewer bankruptcies, the flip side of the coin, Johnston said, is that consumer caution means less money is going into the economy.

Consumer spending accounts for roughly 70 percent of U.S. economic activity.

"It's not altogether good news," said Sam Gerdano, executive director of the American Bankruptcy Institute. "It reflects that consumers are not pulling the wagon."

Paradoxically, when people are spending and adding to their debts, Gerdano said, the economy grows, and so do bankruptcies.

The jump in bankruptcies during the recession was largely attributable to housing debt, and while foreclosures are declining in the Twin Cities, several area bankruptcy attorneys said they're still seeing a steady stream of clients coming in who can't pay their mortgages. Some were concerned that as banks accelerate processing of foreclosures, bankruptcies might jump again.

Minneapolis attorney Curtis Walker said overleveraged homeowners are becoming more willing to give up on a home and declare bankruptcy than in the past, and he was skeptical that filings would continue to decline much further.

"I think the pool is so big that we haven't really reduced it much," he said.