California continues to lead the nation in the number of personal bankruptcy filings for the first quarter of 2010 -- up more than 40 percent over last year. With the widespread insolvency caused by the economic downturn, the trend is likely to continue at least into the second quarter, when most tax refunds arrive.

University of Illinois Urbana-Champaign law professor Robert Lawless, bankruptcy filings typically rise in February and March as cash-strapped debtors use their tax refunds to pay for the cost of bankruptcy.

According to David Jones, president of the Association of Independent Consumer Credit Counseling Agencies, many consumers had been waiting to file because they hoped to receive help with mortgage debt. As that hope fades, many who seek out credit counseling are left with no option but to file for bankruptcy because their level of indebtedness is so great. High rates of new bankruptcy filings appear to correspond heavily with high unemployment and foreclosure rates.

Jones expects 2010 bankruptcy filings to reach 1.5 million -- the annual average before the 2005 bankruptcy law intended to reduce bankruptcy filings was passed. The 2005 law assumed that consumers were abusing the system and imposed higher filing fees, new eligibility requirements, mandatory credit counseling and an eight-year period before consumers could file again.

Lawless agrees that bankruptcy filings are on an "inexorable climb back to the natural filing rate." He expects bankruptcy rates to keep rising but at a slower pace, because a key factor in whether debtors will become overburdened is the availability of credit. Banks are reluctant to lend, access to credit cards has tightened, and the housing market has reduced the availability of home equity-based credit, so consumers don't have access to as much credit as before.

Nationwide, bankruptcy filings are up 17 percent in the first quarter over the first three months of 2009 -- which translates to between six and seven thousand bankruptcies filed every day.

Related Resource

"Bankruptcies resume climbing, aided by tax refunds," (Susan Ladika, CreditCards.com, April 14, 2010)