Bankruptcy

Bankruptcy Filings Rise in July, Set Off Most of June's Decline

By Bob Lawless

My blogging has been a little light lately. Two of my University of Illinois colleagues (Jen Robbennolt and Tom Ulen) and I have been finishing our forthcoming text, Empirical Methods in Law. I am glad to say that we now have a complete manuscript and are looking at a publication date in December. (If you are an academic who might want to teach out of the materials and would like to see them, shoot me an e-mail.)

Among the posts that did not get done was my monthly update on U.S. bankruptcy filings. Earlier this week, Automated Access to Court Electronic Records ("AACER") sent me the statistics through July. The figures show 130,530 total bankruptcy filings over 22 business days in July for a daily filing rate of 5,933. The daily filing rate is a 4.0% increase from the previous month and a 35.4% increase for the same time period one year ago. The 4.0% increase in July comes on the heels of a 5.5% decline in June. The pattern for this year has been the same as in the past few years. The late spring and summer months have seen monthly ups and downs in the bankruptcy filing rate, but the variations tend to cancel each other out. The July bankruptcy filing rate is virtually the same as it was in March.

One question I often get is why bankruptcy filings are not going up. Usually, this question is connected to rising unemployment which would seem naturally connected to the bankruptcy filing rate. There are several answers to that. First, bankruptcy filings are going up. I've updated the filing trend graph, which appears to the right. Until advances in information technology made it possible, we were not able to follow the monthly bankruptcy filing. The most information was available only quarterly and was released usually a few months after the end of the quarter. Although I post on the filing rate each month (and sometimes I wonder if I should), I think we need to be very cautious about drawing too many inferences from the monthly ups and downs of the bankruptcy filing rate. As the graph clearly shows, bankruptcy filings have been on an upward trend and very near the rates they were before the 2005 bankruptcy law.

The second answer to that question is the fact that unemployment is not the bellwether indicator of bankruptcy filings as it is often assumed. Certainly, unemployment is a contributing factor to many bankruptcies. Unemployment alone, however, is not a sufficient reason. Bankruptcy discharges your past debts; it does not find you a job. No debt, no bankruptcy. The best indicator of increases or decreases in the bankruptcy filing rate is the rise and fall of household debt (i.e., consumer debt such as credit cards plus mortgage debt). Historically, bankruptcy filings fell when household debt did not rise as rapidly as it had in the past. Since the last quarter of 2008, household debt has actually fallen. I think it is likely the fall in household debt is tempering the number of bankruptcy filings we are seeing.

Because my points on this topic often are misunderstood, I should make clear two things that I am NOT saying. I am not saying that unemployment is not a contributing factor in many bankruptcies. And, I am not saying that bankruptcy filings are not on the increase. What I am saying is that I believe the bankruptcy filing rate would be even higher had household debt not been falling since late 2008.

Looking toward the rest of the year, my estimate is that we will end up above 1,450,000 (and maybe close to 1,500,000) bankruptcy filings for calendar year 2009. That projection is based on the following extrapolations:

• 1,418,000 filings if bankruptcy filings continue for the rest of the year at the same daily rate (5,649 per day) as they have averaged for the first seven months of 2009
• 1,423,000 filings if bankruptcy filings continue at the same daily rate (5,933 per day) as they averaged for July
  
• 1,493,000 filings if bankruptcy filings for the remaining five months of 2009 constitute the same proportion of total filings as the last five months of 2008 constituted for total filings that year (about 44.4%)

Although the first two calculations suggest an amount below 1,450,000, I like the last estimate as the most reliable. Bankruptcy filings have a lot of seasonality, meaning the first part of the year might not be predictive of the last part of the year but year-to-year comparisons may be better. Bankruptcy filings for the first seven months of 2007 and 2008 were almost exactly the same percentage of filings for the total year (55.8% and 55.6% respectively). Even in 2006, when filings were depressed in the early part of the year because of the surge in filings during late 2005, saw 52.0% of its filings in the first seven months. Based on this history, it seems likely that we have yet to see around 45% of the filings for 2009, and that assumption gets us well above 1,450,000 filings as a projection for the year.

(P.S.--For formatting purposes, I put in small versions of the graph and table. Clicking on them should open up a larger version in a pop-up window.)

Full post as published by Credit Slips on August 07, 2009 (boomark / email).