The American Bankruptcy Institute (ABI) reports that total bankruptcy filings for May 2012 decreased 11% compared to May 2011. Consumer bankruptcy filings for May 2012 decreased 10 percent compared to the May 2011. Some people may view this as a sign of improvement in the economy, but I don’t believe that is accurate. The ABI stated that households have reduced their spending and that a continued drop in bankruptcy filing rates is expected as families cut costs. From my point of view, that of meeting with several families each week and reviewing their budgets, what I’m seeing is that there are a high number of potential bankruptcy candidates that face a more urgent problem than their debt problem: they face an income problem.

An income problem arises when there is simply not enough income coming in to cover basic living expenses, which are all the expenses an individual faces before they pay credit card bills, medical bills, signature loans and personal loans. Most often, the only “debts” that I include in the list of living expenses are the home loan and car loan, because if you don’t pay those things, you can lose those things. The typical categories in the list of living expenses is housing, utilities, home maintenance, food, clothing, laundry, medical expenses, transportation (gas, tires, brakes, oil changes, maintenance), miscellaneous/recreation, insurance, taxes, child support, child care and car payment(s). About 1/3rd of the people that I see for a debt consultation are running out of money before they finish covering the monthly living expenses. In those cases, their income problem is more urgent than their debt problem, and most people in that situation do not have the opportunity to solve their debt problem. So, based on those interviews, I believe it would be a mistake to conclude from the decrease in total filings that the economy is improving.