‘A lot of people on the precipice,’ but bankruptcies drop again

The shop was mostly quiet the first day of business at Debt & Credit Lawyer”™s new office in Norwalk in January after Wilton attorney Sergei Lemberg created a financial rehabilitation walk-in clinic of sorts on Main Avenue.

If not yet ready to install a revolving door, Lemberg expects more people to cross the welcome mat in the coming months as renewed economic confidence emboldens more borrowers to take on debt ”” with unforeseen consequences for some.

Last year in Connecticut, bankruptcy filings dropped to their lowest level since 2007 at the brink of the recession, according to newly published data by the U.S. Courts, even as the Federal Reserve reported household debt nearing an all-time high.

In Fairfield County, 1,400 debtors filed for bankruptcy protection from creditors, nearly 60 fewer than in 2015 for a 4 percent reduction, which was half the rate of decline from the previous year. Statewide, fewer than 5,850 filers declared bankruptcy in Connecticut, down 450 from 2015 and dipping below the 5,900 debtors who did so in 2007.

Against that backdrop, Lemberg Law founder Sergei Lemberg opened a new location in Norwalk called Debt and Credit Lawyer, offering walk-in hours for people burdened with overwhelming loans looking to take the first step. Lemberg said the clinic has been quiet in its early days but expects that to change as more Norwalk residents learn of the services and make the momentous step to try to back away from bankruptcy.

“It”™s like a movie ”” we see the picture, but we don”™t see what”™s behind the (making of the) picture,” Lemberg said. “The picture is rosy: unemployment is down, the stock market is up, bankruptcy filings are down. Looking at that picture, you would think that the actual reality is consistent. I”™m not sure that”™s the case ”” in fact I think that”™s probably not the case.”

In February, the Federal Reserve Bank of New York estimated that U.S. household debt is $12.6 trillion, up 1.8 percent from a year ago to its highest point since 2008 and approaching its all-time high of $12.7 trillion. While U.S. household mortgage debt remains below its 2008 load and credit card debt is roughly on par, both auto loans and student debt are up sharply.

The Fed study does not break out loan status by state. In a separate study published in early March, the Fed determined that Connecticut homeowners today are prioritizing repayment of mortgages to a lesser degree compared to getting out from under credit card and auto debt.

If subprime mortgages were torpedoing household budgets in 2008 and 2009, getting less attention today are subprime auto loans bearing sky-high interest rates. And Connecticut and the nation face a continued epidemic of new college graduates hitting the street on the hook for huge student loans and facing limited earnings potential in the early years of their careers.

If there is a silver lining, it is the U.S. economy as employers ramped up hiring in January. Increased demand for labor could both get people back onto payrolls who need it most, as well as give a jolt to stagnating wages that have limited families”™ ability to keep up with debt obligations.

“Post-election, you”™ve seen a pretty big improvement in household and business confidence,” said Federal Reserve Bank of New York President Bill Dudley during a February conference in New York City hosted by Cornell University. “One of the big open questions that we”™re going to be assessing over the next few months is, is that improvement in animal spirits, so to speak, going to actually feed through and lead to more spending?”

In its own report on 2016 lending in Connecticut across both households and businesses, the Federal Deposit Insurance Corp. calculated that for every $100 in loans outstanding by Connecticut-based banks, just 74 cents of that total is in arrears, down from 89 cents a year ago and nearly $3 in 2012 as consumers succumbed to the lingering effects of the Great Recession.

“We are feeling very good about credit,” said People”™s United Bank CEO Jack Barnes in a January conference call reviewing the Bridgeport-based bank”™s 2016 results. “Our (loan) delinquencies are down; our charge-offs continuing to be very low. Our outlook going forward is very good.”

Still, unexpected household costs could be in the offing, including health insurance premiums as the federal government wrestles with replacing the Affordable Care Act, and as the Fed considers interest rate hikes with an impact for people with existing credit card debt and other loans featuring adjustable rates, as well as people seeking a new loan.

About 11 percent of Connecticut residents saw their credit rating score decline in the most recent FICO analysis published by ValuePenguin. “These pressures have a lot of people on the precipice,” Lemberg said. “And there”™s a student loan crisis that is just sitting out there, simmering. ”¦ You see people coming in with these student loans, and they are staggering.”

Alex.Soule@scni.com; 203-964-2236; www.twitter.com/casoulman. This article first appeared in Hearst Connecticut newspapers on March 12.