Bankruptcy

Bankruptcy Filings Spike in October

By Bob Lawless

As yet another indicator of the tough economic times for American families, bankruptcy filings spiked in the month of October. According to the latest data from Automated Access to Court Electronic Records (AACER), there were 108,595 total bankruptcy petitions filed in the month of October for an average of 4,936 for each of the 22 business days during the month. October 2008 is the first time since the 2005 changes to the U.S. bankruptcy that there have been more than 100,000 bankruptcy filings in one month. (Anyone looking for more sensational but less helpful headlines can focus on the absolute number of filings in October 2008 and ignore the fact that the month had one more business day than many other months.)

Why the increase? Obviously, one factor is the tough economic climate for everyone. An important factor that is often ignored is that, in the short-term, decreases in the availability of credit actually drive up the bankruptcy filing rate. I document this phenomenon and explain it in more detail in my paper, The Paradox of Consumer Credit. Of course, in the long-run, bankruptcy filing rates rise hand-in-hand with increases in credit availability. Over the short-term, however, bankruptcy filing rates as individuals find it more difficult to borrow to stave off the day of financial reckoning. With the seizing up of the credit markets, the October bankruptcy numbers (and the smaller increases in July, August, and September as I discuss below) show this scenario has played out again.

The average daily filing rate in October 2008 represents a 7.9% jump from the previous month and a 33.4% increase over the same month one year before. After 2.4% rises in July and August and a 2.0% increase in September, the October jump is a big one-month rise. To put it in perspective, consider that if we experienced the same growth in bankruptcy filings over the next 12 months as we did in October--albeit an unlikely scenario--bankruptcy filings would grow at an annual rate of over 230%, and we would have over 2 million bankruptcy filings over the next 12 months.

It is now virtually certain we will have right around 1.1 million bankruptcy filings in the 2008 calendar year. For bankruptcy filings not to hit that mark, we would have to experience a significant decline in November and December. Using different assumptions for an estimate, bankruptcy filings will be:

• 1,080,000 filings if bankruptcy filings continue for the rest of the year at the same daily rate (4,284 per day) as they have averaged for the first ten months of 2008
• 1,106,000 filings if bankruptcy filings continue at the same daily rate (4,936 per day) as they averaged for October 2008
• 1,093,000 filings if bankruptcy filings for the remaining two months of 2008 constitute the same proportion of total filings as the last two months of 2007 constituted for total filings that year (about 16.9%)

Full post as published by Credit Slips on November 03, 2008 (boomark / email).