In the year after the government overhauled its bankruptcy rules, filings have plummeted.

Bankruptcy courts became ghost towns and lawyers closed their doors as monthly filings fell as much as 92 percent in Arizona. Overall, bankruptcy filings remain down 83 percent statewide through September, according to the U.S. Bankruptcy Court's District of Arizona. Nationally, numbers were off 68 percent in the first half of 2006, the latest data from the American Bankruptcy Institute.

Industry watchers say Arizonans may be staying out of court in larger numbers because of the significant run-up in home equity in 2005.

Experts say the number of cases may be depressed this year also because of an onslaught of last-minute filings prior to the law's change on Oct. 17, 2005, confusion over the new rules, and higher attorney and court fees.

Although creditors call the change a success for now, some economic experts say the lower numbers aren't necessarily a good sign for the economy.

Retailers have been relying on consumers using credit to keep the economy going, said Dawn McLaren, a research economist with Arizona State University. If consumers continue, it will likely hurt credit ratings, which means they will pay more to buy less.

"If they don't get to declare bankruptcy and start with a clean slate," she said, "these (debts) will stick with you forever."

Most attorneys say they expect the number of cases to begin climbing the remainder of this year and into 2007 as struggling households in adjustable mortgages are hit by higher payments, foreclosures climb and home-equity reserves run out.

"I've been surprised they haven't gone back up as quickly," said Henry J. Sommer, an expert in bankruptcy trends and editor in chief of LexisNexis' Collier on Bankruptcy.

Economic cushions

A large number of potential filers may be staying out of court because the economy remains relatively strong, industry watchers said.

Bankruptcies are generally a lagging economic indicator. They go up after significant climbs in unemployment or after consumer-debt levels reach new heights.

Filings were trending down before the reforms were enacted. About the same time, Valley home prices were climbing 30 to 50 percent, giving debtors an added source of money via home equity loans.

"People have been using their houses as ATMs," said Adam Brauer, president of Scottsdale-based Debt Settlement USA, which negotiates with creditors to reduce consumer debts.

"What we find is people paid off their credit cards but then ran up their credit. . . . I think 2007 is going to be a real problem year."

Mike Sullivan, education director of credit counseling agency Take Charge America, said home equity has played a lesser role the past six months.

"They're now suffering from the bursting of the real estate bubble," he said. "They can't say, 'It's been another six months; I can get another $20,000 from my house.' "

Another issue is some folks are simply in denial about their finances, so they won't file for bankruptcy for some time.

Rush to file

Banks and credit-card companies lobbied for the reforms for eight years, claiming bankruptcy was too often used as a money-management tool and that tougher rules were needed to stop abuses by compulsive shoppers and gamblers.

Opponents argued a new law wouldn't keep filings down in the long term. Few households have adequate savings to deal with medical emergencies, job losses or financial hardships caused by divorce, so they would still end up in bankruptcy regardless of the law.

When the bankruptcy reform bill was signed in April 2005, filings began to climb.

In the two weeks before the reforms became law, more than 11,000 bankruptcy cases poured into the state. Then, they nearly came to a halt.

Since Oct. 17, 2005, more than 5,400 cases have been processed statewide. Filings exceeded 38,600 in the first 9½ months of 2005.

"There was probably a six-month supply of cases that got filed in the first two weeks of October," said Phoenix attorney Lawrence Hirsch, who represents consumers in bankruptcy.

In all, more than 39,000 filed for protection last year, eclipsing the annual record set in 2003 by 25 percent.

Confusing changes

The new law ushered in some dramatic, sometimes confusing, changes.

Some consumers are avoiding bankruptcy in part because they just don't understand how it now works or have incorrectly interpreted the new law, Bankruptcy Court clerk Terry Miller said.

For example, many people don't understand what kind of bankruptcy they can file based on their income.

The new law requires consumers to prove they don't have enough income to pay back debts over a five-year period. If the court determines they do, they are told how much to spend on housing, entertainment and other living expenses.

In Arizona, a debtor supporting a family of four earning more than $61,102 must reorganize debts under a Chapter 13 instead of erasing debts in a Chapter 7.

"The Chapter 13 filing is a pretty drastic activity, where they're put on a severe budget for five years," Sullivan said. "(Potential filers) are throwing up their hands and saying, 'I can't do it.' "

Some also are turning to credit counseling, which is now a prerequisite of filing for bankruptcy.

Among them is Christopher Umsteadt, 22, who racked up $13,000 in debt, caused primarily by a broken lease.

"They say bankruptcy is bad," the Avondale resident said. He didn't want the blemish it would cause on his credit report to keep him from getting approval on a home.

Instead, he tried counseling and found it was able to help him negotiate a manageable payment that he can handle on his $1,800-a-month salary.

Significant costs

Some people in need of debt relief haven't been filing because costs have doubled, making it unaffordable to those who need it, attorneys said.

"All the law has done is make it more expensive, more difficult for people," said Debt Settlement's Brauer, a former bankruptcy attorney.

Attorney fees for typical bankruptcy liquidation ran between $1,000 and $1,500 a year ago. Today, those fees are generally running between $2,000 and $3,000 because of added time verifying client assets, a requirement under the new law.

The American Bankers Association notes court fees and cost of credit counseling can be waived for low-income debtors. It also states that the cost is still low relative to the financial relief it provides.

Still, Valley lawyers say that the cost is pushing many debtors to file for bankruptcy without legal representation. Some attorneys estimate that as many as 50 percent are self-filers, up from about 30 percent last year.

Adela Ibrahim, who came to Arizona from Michigan last year, is among them.

The hairdresser found herself saddled with more than $50,000 in legal bills and credit-card debt. Family helped her out, but she sought bankruptcy protections when she began to fear she would lose her home.

The high costs, however, led the Gilbert mother of three to file without an attorney in May. Her experience has been riddled with frustration as she's tried to navigate all the rules.

"I should have filed with an attorney," she said. "With the new law, . . . I don't know what's the truth."

Bankruptcy outlook

For now, creditors are careful about making conclusions about filing trends, but they're happy with what they've seen thus far.

"The law is working as intended," said Laura Fisher, spokeswoman for the American Bankers Association. "So far, the people who need protection are getting it."

Creditors sought to get more filers repaying debts. In Arizona, more are doing that compared with last year, when just one out of 10 reorganized debts. Now, two out of 10 are doing so, but that is just a return to normal levels, according to data from the Bankruptcy Court.

Overall, attorneys don't expect bankruptcy filings to stay low forever.

Seven out of 10 lawyers surveyed by the National Association of Consumer Bankruptcy Attorneys expect a slight or major increase to show up in third-quarter bankruptcy statistics. Similarly, seven out of 10 expect filings to return to pre-reform law levels by the end of 2007.

Economist McLaren notes household debt is now just shy of 14 percent of disposable personal income, the highest level of the past 26 years. Those higher debt levels could force more filing, as could the increase in foreclosures.

Miller also sees trouble in all the adjustable mortgages hitting homeowners with higher interest rates.

"But it may be many more months for that to work out in the numbers," Miller said.