Bankruptcy

March Bankruptcy Filings Are Up But Not "Spiking"

By Bob Lawless

Media outlets are reporting that bankruptcy filings climbed sharply in March (see, for example, Duff Wilson's report in the New York Times or the Reuters wire story). Those reports are not wrong, but they don't tell the whole story. As always, many thanks to the ever efficient Automated Access to Court Electronic Records (AACER) for providing the data.

It is true that there were over 158,000 bankruptcy filings in March 2010, and it is also true that this figure represents a 35% increase over February. Long-time Credit Slips readers know the golden rule for monthly bankruptcy filing data: Thou Shall Adjust for the Number of Business Days in the Month. The total monthly bankruptcy filing figures are very sensitive to the number of business days in a month. In fact, since 2007, the number of business days alone explains about 30% of the variance in the month-to-month differences.

There were 23 business days in March as compared to only 19 in February. Once one adjusts for the number of business days, the March filing figures show a much less dramatic increase and an increase that is very much in keeping with both historical cycles and recent trends. March had a daily bankruptcy filing rate just under 6,890, which is a 11.6% increase from the February daily bankruptcy filing rate of 6,170. To put some perspective on the 11.6% increase, consider that February was a 14.2% increase over January. These increases are consistent with the historical cycle of filing rate increases early in the year. If the cycle holds again this year--and there is no reason it shouldn't--the rest of the year should have a relatively constant filing rate until late fall.

Moreover, the rate of increase is slowing considerably. I've used the graph to the right before, but it seemed like a good time to update it (click on it to get a larger version). March 2010's daily filing rate was a 14.8% year-over-year increase, but consider that March 2009 had a year-over-year increase of 39.4%.

I do not want to be misunderstood. The bankruptcy filing rate has been going up, which is hardly a sign of a robust economy. The U.S. bankruptcy rate, however, is more sensitive to other factors, such as the amount of consumer credit outstanding than macroeconomic conditions. For example, the bankruptcy rate climbed steadily, during good and bad economic times from the mid 1990s through 2004.

 We're reaching the point where the bankruptcy filing rate will have to level off. The highest per capita bankruptcy rate was about 5.6 per thousand in the 2003-2005 calendar year. To reach that same per capita rate in 2010, we would need a daily filing rate of about 6,800. March 2010 pretty much hits that number right on the head. The last few quarters have actually seen a decline in the amount of outstanding consumer credit. In the short run, that decline is probably responsible for some of the increase in the bankruptcy filing rate because, as people run out of options to borrow, one of the places they end up is bankruptcy court. But, a decline of consumer credit should have a long-term effect of holding down the bankruptcy filing rate. With less debt, consumers have less reason to file. We are likely reaching a saturation point for bankruptcy filings such that the rate may level off somewhere around its current level.

With three months in the book, we also can begin to look at projected filings for the 2010 calendar year. My prediction of around or just above 1.7 million is looking pretty good. At the time, I had said February and March of 2010 would give us big clues about how the rest of the year might go. The increases we have seen suggest we might get closer to 1.70 million than 1.65 million. Here are the projections for 2010 based on the numbers we have so far:

• 1,566,000 filings if bankruptcy filings continue for the rest of the year at the same daily rate (6,213 per day) as they have averaged for the first three months of 2010 (Note that this estimate is almost certainly too low for an annual projection given the low January 2010 figure, and I have left it off the chart.)
• 1,694,000 filings if bankruptcy filings continue for the same daily rate (6,888 per day) as they have averaged for March 2010
• 1,689,000 filings if bankruptcy filings for the remaining nine months of 2010 constitute the same proportion of total filings as the last nine months of 2009 constituted for total filings that year (about 77.6%)

Full post as published by Credit Slips on April 02, 2010 (boomark / email).