Projected Bankruptcy Filings in 2009
Someone asked me about projections for U.S. bankruptcy filings in 2009, raising the issue of whether one can predict the future. Because I can't predict the past, however, we'll have to settle for my projections about the year to come. My track record isn't that bad. Back in February of 2008, I predicted the calendar year would see more than 1 million bankruptcies in the United States. It looks like we'll end up at right around 1.1 million bankruptcies, which is more than 1 million. OK, it's 10% more than 1 million, but that's not too bad.
For 2009, I am expecting a little under 1,400,000 bankruptcy filings. That's an estimate by extrapolating the current filing rates and trends, tempered with a little bit of judgment. The rest of this post will explain how I arrived at that number.
Lower bound: We are now already at a filing rate of over 5,075 for each business day. There are 250 business days in 2009, which computes to 1,260,000 filings. Of course, that computation assumes no growth rate in the bankruptcy filing rate and that seems highly unlikely. Besides the fact that the daily bankruptcy filing rate has grown 54% over the past twelve months, the economic conditions suggest further increases in the rate at which American consumers and businesses will file bankruptcy. This figure thus seems like a reasonable lower bound of what the total filings might be.
Upper bound: If the bankruptcy filling rate grew another 50% in 2009, we would be over 7,600 daily bankruptcy filings. Spreading this growth over the year, we would have more than 1,610,000 filings in 2009. That number would roughly equal the annual bankruptcy filing levels before the 2005 changes to the bankruptcy law. Despite the economic crisis, that number still seems too high for 2009. First, the bankruptcy filing rate probably will not continue to grow at the breakneck annual rate of 50%. At some point, we just run out of people who might contemplate filing bankruptcy. Second, the conditions for a bankruptcy filing are created by layoffs, medical problems, and family breakups, but the timing is largely determined by the availability of consumer credit. As people run out of borrowing options to stave off the day of reckoning, they turn to the bankruptcy courts. If all the government interventions result in at least a partial easing of the credit markets, the growth in the bankruptcy filing rate should ease. Thus, I think 1,610,000 is an upper boundary of 2009 bankruptcy filings.
Middle Ground: We can run a simple regression line (i.e., a trend line) to project bankruptcy filings through 2009. Yes, I know that there are econometric reasons why that is not necessarily a good statistical fit, but it works for a general estimate. Depending on the assumptions one uses, a trend line comes out around 1,350,000 - 1,400,000 bankruptcy filings for 2009. With our economy in recession, the upper end of that range is a better estimate. People are hurting, and it is showing up in the bankruptcy courts.
All Bets Are Off: If Congress passes and Obama signs a law that would give bankruptcy judges the power to modify home mortgages, then all bets are off. Under this scenario, we could expect bankruptcy filing rates to rise dramatically, perhaps to much more than 1,610,000. Although I have heard predictions that such a law might double the number of bankruptcy filings, I do not think that a doubling of the filing rate is a likely outcome. Although the power to modify home mortgages would lead a large number of persons to seek bankruptcy protection to save their homes, we have to remember that prebankruptcy negotiations take place in the shadow of the law. I would expect a significant number of homeowners could use the leverage such a change would give them and avoid bankruptcy by negotiating with lenders to keep a home without a bankruptcy filing.