Bankruptcy

Bankruptcy Filings Maintain a Steady State

By Bob Lawless

The good folks at Automated Access to Court Electronic Records (AACER) report there were over 125,500 total bankruptcy filings in September. The daily bankruptcy filing rate was 5,980 for an increase from August of only 0.5%.

Recent media reports and blog posts like to comment on how monthly bankruptcy filings have surged, soared, and skyrocketed. The reality is not as dramatic. The bankruptcy filing rate remains pretty much where it was in March when it was 6,000 filings per day. In fact, from March to September the daily bankruptcy filing rate has been 6,000 filings per day. (Those are not rounded-off figures.) From month-to-month the rate has moved up and down a few percentage points, but that is what monthly rates do.

The dramatic comparisons (and news stories and blog posts) come from year-over-year increases. September 2009 did show a 31% year-over-year increase as compared to September 2008. Guess what? That is the lowest year-over-year increase since September 2008, which showed a year-over-year increase to September 2007 of 28.9%. In turn, September 2007 had a year-over-year increase of 27.9% as compared to 2006. In fact, the average monthly year-over-year increase since January 2007 has been 37.6%. If you want a big headline, all you have to do is report the year-over-year increase. By that measure, however, September 2009 had a lower-than-average year-over-year increase.

What has been happening since January 2007 to account for the large year-over-year increases? Bankruptcy filings plummeted immediately after the 2005 bankruptcy law was adopted. Since then, bankruptcy filings have been climbing back to the level they were before the 2005 bankruptcy law was adopted. Long-time readers of this blog will be familiar with my posts making that point, the latest of which was just over a month ago. Indeed, I feel like I'm probably just preaching to the choir by posting these comments here. Focusing on year-over-year increases is going to produce dramatic, if not misleading, stories.

By the way, I'm not claiming the U.S. economy is not playing a role in the current bankruptcy filing rate. The economy, however, is by far from the only thing driving bankruptcy filing rates. A lot of people are at the end of their financial string, but that is different from from filing bankruptcy. The media often equates "broke" and "bankrupt," but one is a financial status and the other represents a decision to initiate a costly legal proceeding with certain benefits and consequences. There is some relationship between the economy and the bankruptcy filing rate, but it is hardly a 1:1 effect.

Also, I'm not trivializing a bankruptcy filing rate of 6,000 bankruptcy per day. That is 1.5 million bankruptcy filings per year for a bankruptcy rate of about 4.9 filings per 1,000 population. The divorce rate, by way of comparison, is estimated to be only 3.5 per 1,000 population. Every divorce involves two persons for a rate of 7.0 persons per 1,000 population involved in a divorce each year. About one-third of bankruptcy filings, however, formally involve a husband-and-wife for an implied rate of about 6.5 persons in bankruptcy per 1,000 population. Also, in some cases only one person in a couple files the bankruptcy petition, meaning it does not formally count as a joint case, but the bankruptcy clearly affects the household. With 1.5 million bankruptcy filings per year, as many persons will go through the bankruptcy system each year as go through the divorce courts. (True, my figures are using total bankruptcy filings, but filings by corporations, LLCs, and the like count for only a small part of total bankruptcy filings, about 1.5%. Most all bankruptcy cases are filed by individuals.)

I'm also not claiming that bankruptcy filing rates won't climb again in the future. I don't expect them to increase dramatically before the end of the year because, historically, the big increases have come in January, February, and March. The early part of 2010 will give us a big indication of whether the daily bankruptcy filing rate will climb above 6,000 or whether this figure represents a new plateau going forward.

I have made it traditional in these monthly posts to project total bankruptcy filings for the calendar year. With only three months to left in 2009, here are the projections:

• 1,435,000 filings if bankruptcy filings continue for the rest of the year at the same daily rate (5,720 per day) as they have averaged for the first nine months of 2009
• 1,450,000 filings if bankruptcy filings continue at the same daily rate (5,980 per day) as they averaged for September
  
• 1,481,000 filings if bankruptcy filings for the remaining three months of 2009 constitute the same proportion of total filings as the last three months of 2008 constituted for total filings that year (about 27.0%)

Because of the seasonality in the bankruptcy filing rate, I always like the last number as the best prediction. Looking back to 2007, we only had 24.7% of all filings in the last three months of that year. For this reason, the 2008 comparison might produce a figure that is a little high. If I average our experience from 2007 and 2008, I get a projection of 1,450,000 bankruptcy filings for the 2009 calendar year, and that is the same result we get if bankruptcy filings continue at 6,000 per day. Thus, I think 1,450,000 is about where we'll end up for 2009.

Full post as published by Credit Slips on October 06, 2009 (boomark / email).