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Bankruptcies wane as US relearns how to save

Personal bankruptcy filings have plunged to their lowest levels in four years as many Americans cut up credit cards and socked away cash following the recent financial crisis and recession.

Bankruptcies filed by individuals fell 13 percent in the first half of the year and are down nearly 20 percent over the past two years nationwide. Massachusetts has recorded an even steeper decline, with personal bankruptcy filings down by nearly a quarter since 2010.

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“The phone doesn’t ring as much,” said John-Paul LaPré, a longtime bankruptcy attorney in Marlborough, whose case­load has fallen by half over the past few years.

US bankruptcy courts recorded more than 627,000 new bankruptcy filings nationwide in the first six months of the year, down from 781,000 in the same period in 2010, according to data collected by the Administrative Office of the United States Courts . In Massachusetts, more than 9,000 people filed for bankruptcy in the first half of this year, down from nearly 12,000 in the first half of 2010.

The decline follows four years of consumers whittling household debt and increasing savings, making them less vulnerable to economic shocks, such as layoffs, that can force them into bankruptcy. Bankruptcy specialists say Americans started saving more and borrowing less after the housing bubble burst — partly because banks curbed lending and partly because many people, anxious about losing jobs, socked away money.

“If people don’t have debt, they don’t file for bankruptcy,” said Robert M. Lawless, a professor at the University of Illinois College of Law who specializes in bankruptcy. “A few years ago, people weren’t able to borrow like they have in the past.”

The Federal Reserve recently reported that required household debt payments, including mortgages, amounted to less than 11 percent of discretionary income in the first quarter of this year, down from more than 14 percent in late 2007, just as the the last recession began. It is the lowest debt burden since 2004 as millions of people paid down credit cards, sold homes, and refinanced or modified mortgages.

Like many people, Gina Masters, a real estate agent, got in trouble during the boom years when it seemed all too easy to make money buying and selling homes.

Masters, 36, bought a $45,000 metallic blue convertible. She racked up credit card debt dining out with friends, buying pricey gifts, and splurging on everything from salon visits to clothes. Then her income plunged when the real estate bubble popped, pushing her deeper in the hole. By 2008, she and her husband owed $80,000 in loans and faced more than $2,000 in monthly debt payments — not counting the $200,000 mortgage on their spacious two-bedroom condo in a wooded section of Essex Junction, Vt.

Masters and her husband chipped away at the debt. They cut out almost all the extra expenses — everything from fancy haircuts to eating out to a deluxe cable package. “We went without a lot of things,” Masters said, adding that her husband’s shoes were falling apart at one point.

Now, after four years, Masters and her husband hope to pay off a $5,200 personal loan from a friend, their last debt, except for their mortgage. And then they plan to keep saving to bolster their emergency fund. “It was a really long road,” Masters said. “It’s kind of surreal.”

Like Masters, many other Americans are saving more. Americans saved about 4 percent of their income in the second quarter, up from just over 2 percent before the recession began and close to 1 percent near the height of the national housing bubble in 2005, according to the US Commerce Department.

Joshua Shapiro, chief US economist for Maria Fiorini Ramirez Inc., a financial consulting firm in New York, said several factors have pushed saving rates higher, starting with banks becoming stingier about extending credit.

Home values dropped, so people no longer had access to large home equity lines of credit. And as they watched 401(k)s and home values shrink in recent years, many families realized they needed to save more for retirement and emergencies. “They no longer viewed their homes as their piggy banks or ATMs,” Shapiro said.

Still, many Americans continue to struggle as the national unemployment rate remains stubbornly above 8 percent. Patrick L. Mead, a Hingham bankruptcy attorney with nine locations in Massachusetts, said calls continue to pour in from people who cannot pay their bills and are desperate to avoid foreclosure. Mead said he is even considering hiring another attorney or paralegal to help handle the load. “I am definitely swamped,” said Mead, who added he is working seven days a week to keep up.

The main cause of personal bankruptcies remains people taking on a large amount of debt and then suffering a significant economic setback — such as a major illness, divorce, or job loss, bankruptcy specialists said. At the same time, only a portion of people who struggle to pay their bills wind up filing for bankruptcy, which can often wipe out their debt, but damage their credit.

Some debt, such as student loans, generally cannot be discharged in bankruptcy court. Some people are so stretched that they cannot see how they will come up with the money to pay legal and filing fees — anywhere from a few hundred to a few thousand dollars. And many Americans feel a moral obligation to pay their debts.

Bankruptcy trends follow economic cycles. As the economy improves, housing prices stabilize and banks return to lending more freely and consumers take on more debt, leaving them vulnerable to economic shocks. Bankruptcies could start climbing again in the next few years as banks extend more credit and consumers start borrowing more, bankruptcy specialists say.

“The historic pattern of bankruptcy filings is they follow rising consumer debt,” said Sam Gerdano, executive director of the American Bankruptcy Institute, a nonprofit research center in Alexandria, Va. “So when you have a growing economy with growing consumer spending, that makes individuals and families vulnerable when something bad happens.”

Todd Wallack can be reached at twallack@globe.com.
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