Bankruptcy

Bankruptcy Filings Follow Their Usual Summer Sideways Move

By Bob Lawless

The bankruptcy filing statistics for September have displayed their usual sideways move during the summer. Since May, each month's filing rates have moved up or down. Overall, however, bankruptcy filing rates, while somewhat lower, are approximately where they were at the beginning of the summer.

September's total daily bankruptcy filing rate was 6,380, a monthly increase of 3.5% that comes after a monthly decline of 3.9% in August. For comparison, bankruptcy filings spiked higher than usual in March 2010, making April a better reference. In April, the daily bankruptcy filing rate was 6,650. For the past twelve months, the average daily filing rate has been 6,220.

The last time I posted on monthly bankruptcy statistics, a few people criticized me for focusing on a decline in the monthly swing instead of an increase in the year-over-year comparison. Those criticisms miss the bigger picture. Bankruptcy filings have been on a rapid increase back toward pre-2005 levels before the changes to the U.S. bankruptcy law. September 2010 had a year-over-year increase of 6.6%, but the comparable year-over-year figures for September 2008 and September 2009 were 28.8% and 32.5%. The rate of increase in the rate of increase has been declining rapidly. This is not because of some favorable turn in the U.S. economy but because filing rates were artificially low from 2005-2008/2009 due to changes in the U.S. bankrutpcy law (where "artificially low" means lower than they probably would have been considering other macro-economic factors).

The slowing of the rate of increase in U.S. bankruptcy filings is hardly a cause for celebration. U.S. bankruptcy filings are near historic highs. The current bankruptcy filing rate is about 5.0 filings for every 1,000 persons. The all-time high is 5.7 filings per 1,000 persons in 2003 (throwing out the anomalous year of 2005 when the bankruptcy law changed).

Should we be troubled by those numbers? A few reference points will help, but we first have to translate the filing rate of bankruptcy cases into a rate of the number of people who file bankruptcy. The U.S. will have about 1.6 million bankruptcy cases this year (see below), and about 30% of these cases are joint cases filed by both a husband and a wife. Therefore, an estimate of the total number of people who file bankruptcy each year would be easily over 2.0 million.

How do 2.0 million people filing bankruptcy compare to other markers of modern-day life? U.S. colleges and universities will award about 1.6 million bachelor's degrees this year. The American Cancer Society estimates there will be around 1.5 million new cases of cancer this year. Finally, 2.0 million people in bankruptcy translates into 6.5 people per thousand compared to a divorce rate of 3.6 people per thousand. (These were comparisons that Elizabeth Warren first pointed out, although I have updated the figures, see, Warren, "A New Conversation About the Middle Class," Harvard Journal on Legislation, 44:119-122 (2007).)

Even then, these figures are underestimates of the number of persons affected by bankruptcy because many married persons file without including a spouse. More significantly, counting the number of persons filing bankruptcy does not include children or dependents or family members or others who rely on someone going through the bankruptcy process. Also, bankruptcy filing figures do not capture the totality of persons in financial distress because many financially overstretched debtors never file bankruptcy. Saying that the bankruptcy filing rate has levelled off is a statement about a statistical trend, not a statement that the American middle class is suddenly in great shape.

Turning to the rest of 2010, we only have three months left, making the prediction for annual filings a clearer. All of the different calculations are pointing to just above or just below 1.6 million flings. Specifically, total U.S. bankruptcy filings for the 2010 calendar year will be:

• 1,597,000 filings if bankruptcy filings continue for the rest of the year at the same daily rate (6,338 per day) as they have averaged for the first nine months of 2010
  
• 1,602,000 filings if bankruptcy filings continue for the same daily rate (6,380 per day) as they have averaged for September 2010
• 1,603,000 filings if bankruptcy filings for the remaining three months of 2010 constitute the same proportion of total filings as the last three months of 2009 constituted for total filings that year (about 25.2%)

On a personal note, let me again and as always thank Mike Bickford and Automated Access to Court Electronic Records (AACER) for providing these data. Without their help, I would not be able to provide these updates on bankruptcy filing trends, which I hope at least a few people find helpful.

Full post as published by Credit Slips on October 06, 2010 (boomark / email).