Despite the growth of the Alabama auto industry and other economic gains, the state is reporting bankruptcy rates in 2006 that rank among the highest in the nation.
And with high poverty levels, low job growth and weak consumer protection laws, experts say the state isn't likely to lose its place near the top of the bankruptcy list.
Although the number of bankruptcies filed by consumers has dropped dramatically since federal bankruptcy reforms took effect last fall, Alabama has earned the dubious distinction of moving to third place - from 10th the year before - among states for per-capita bankruptcies in the first quarter of 2006, with 3.19 filed for every 1,000 consumers, according to the Federal Deposit Insurance Corp.'s recent economic profile of states. Nationally, 1.51 of every 1,000 consumers filed for bankruptcy during the first quarter of this year.
Alabama historically has ranked high for bankruptcy filings, says John Norris, senior fund manager and chief economist with Morgan Asset Management, a subsidiary of Birmingham-based Regions Financial Corp. He says both short-term and systemic problems could be to blame for the latest figures.
There is a strong correlation between poverty levels and bankruptcy rates, Norris says, and Alabama's poverty rates have risen in recent years.
In Alabama, 16.9 percent of residents, or about 763,000 people, lived in poverty in 2004, according the U.S. Census Bureau. That's up from 13.3 percent, or 583,000, in 2000.
"When you look at the poverty rate, it's not surprising that we're going to lead the nation in terms of bankruptcies," he says.
Norris notes that seven of the 10 states with the highest per-capita bankruptcies also report poverty rates above the national average.
In Tennessee, for example, which reported the highest rate of bankruptcy in the FDIC report, 15.9 percent of residents were living in poverty in 2004, well above the national rate, which was 12.7 percent. Georgia, the No. 2 state for bankruptcies, reported a 13.1 percent poverty rate.
Job cuts in some parts of the country also play a role, Norris says.
Despite the boom of its automotive sector, Alabama has sustained continued job losses from textile and paper mills and chemical plants that have hit some rural areas hard, he says.
In 2000, Alabama reported about 353,000 manufacturing jobs, he says. By 2004, that number had dropped to 286,000.
During that time, the state's population grew 1.9 percent, below the U.S. average of about 4 percent, a sign of low economic activity, Norris notes.
Taken together, those factors are "going to lead to a higher level of bankruptcies; there's just no way around it," he says.
Regionally, states in the South and upper Midwest ranked highest for bankruptcies in the recent report. As Norris notes, "you've got a lot of the Rust Belt and the Textile Belt being represented."
Richard A. Brown, chief economist with the FDIC, says it's not unusual for Alabama and Southern neighbors such as Georgia and Tennessee to rank high on the list, but higher rates in auto-dependent regions of the upper Midwest represent an economic shift, as cutbacks by the nation's Big Three automakers have filtered through the economy.
Still, economic factors are only one side of the story.
Also important, says David Skeel, a scholar-in-residence at the American Bankruptcy Institute, is the level of protection afforded consumers by individual state laws. "In states with pro-creditor collection laws you are likely to see higher per-capita bankruptcy rates," he says. And generally, laws in Southern states tend to be pro-creditor, he adds.
Skeel says Alabama, too, may have been impacted by bankruptcy reforms.
The new laws, which took effect last fall, were designed, in part, to push some filers from Chapter 7 liquidation into Chapter 13 reorganization, requiring them to repay more of their outstanding debt.
Skeel says the laws may have had less of a "chilling effect" in Alabama than in other states because, historically, Alabama has always had a relatively high percentage of Chapter 13 filers.
Brad Botes, a principal with Birmingham law firm Bond Botes Reese Shinn & Wilks PC and former executive director of the National Association of Consumer Bankruptcy Attorneys, says Alabama law allows for the protection of only $5,000 in home equity, compared with $75,000 in Mississippi and an unlimited amount in Florida.
As a result, Alabama homeowners often face selling their home in a Chapter 7 liquidation in order to pay creditors. Opting for Chapter 13 is the best way to protect their homes.
Skeel says the local legal culture, too, may play a part. The state's tendency toward Chapter 13 dates all the way back to the 1930s, he says. "There are different kinds of pressures in different courthouses coming from the judges and coming from the bankruptcy lawyers, and that affects a lot of things."
Despite Alabama's surge in the state rankings, filings here, as in the rest of the country, have shown a huge drop since federal changes took effect last fall.
Nationwide, personal bankruptcy filings were down to 112,685 for the first quarter of this year, compared with 393,086 for the same period last year, according to the American Bankruptcy Institute. For Alabama, only 3,653 non-business bankruptcies were filed in the first quarter of 2006, down from 10,871 in the year-earlier period.
Skeel says the numbers aren't likely to remain so low - in fact, they already are beginning to edge up.
Greg Case, an attorney with Southern Law Group PC in Hoover, says December and January were quiet months for the bankruptcy side of his practice, but now he's getting a dozen or so inquiries a day from potential filers.
The early confusion about just how the law would play out in the courts has begun to die down, he says, making people more comfortable filing again. "I think the trial and error phase of it's ending. I think it's getting back to where you're pretty confident in knowing what the law is."