Guesstimate of 2010 Bankruptcy Filings
How many U.S. bankruptcy filings will there be in 2010? A "projection" would imply all sorts of careful analysis with regressions and charts. I don't have that, but I do have a guesstimate based on the trends we have seen recently. Last year, I made a guesstimate of a little under 1.40 million bankruptcy filings, and we are going to have 1.45 million bankruptcy filings in 2009. That's not too bad for a guesstimate.
It's probably best to think about the possible outcomes as a range. Right now, bankruptcy filings are running about 6,000 per day. That is an annual filing rate of just over 1.5 million. The rate of increase in bankruptcy filings is falling, but it is unlikely that bankruptcy filings will actually decrease next year. With the last part of 2009 seeing continued declines in the amount of consumer credit, short-term bankruptcy filing rates should increase as consumers run out of the ability to borrow in order to stave off the day of reckoning. In the long-run, the decline in consumer borrowing will have a negative effect on bankruptcy filing rates--if there is less debt, there is less reason to file bankruptcy--but those effects probably won't be felt until later in 2010 or in 2011. It is unlikely that we will have less than 1.5 million bankruptcy filings in 2010.
At the other end of the extreme, we could consider that 2009 will see an annual increase of around 31% in bankruptcy filings, and that increase comes on the heels of annual increases in 2008 of 32% and in 2007 of 28%. Another increase of that magnitude would push total U.S. bankruptcy filings close to 2.0 million. That figure seems unlikely. First, as mentioned above, the rate of increase in the U.S. bankruptcy filing rate is declining--the last few months have seen the lowest year-over-year increases using exclusively post-2005 law data. Second and even more compellingly, U.S. bankruptcy filings capped out at around 5.6 to 5.7 per 1,000 persons in 2003. (I'm not counting the anomalous year of 2005 when the law was changed.) based on the current U.S. population, that would mean a filing rate of around 7,000 per day or about 1.75 million annual U.S. bankruptcy filings. Given the current rate of bankruptcy filings and given that the 2005 bankruptcy law made it more expensive to file bankruptcy (both in terms of financial cost and hassle), it is unlikely that the filing rate would explode past historical caps.
So far, I've constructed a range of 1.5 million to 2.0 million bankruptcy filings. That's quite a range, but I've also explained that I think the extreme ends of the range are unlikely. After the 2005 changes to the bankruptcy law dramatically drove down filing rates, many experts predicted an eventual return to the same filing rate as before the law. As discussed in the previous paragraph, that would be 1.75 million bankruptcy filings for 2010. Such a filing rate would represent only a 17% annual increase, and the current year-over-year increases on a monthly basis are running around 20%. I've also noted the rate of increase is actually falling, so we might fall below a 17% annual increase for 2010. An annual number of bankruptcies somewhere or around or just above 1.7 million bankruptcies is thus a fair estimate for 2010.
Some readers might wonder why I have not said much about the effects of the U.S. economy on bankruptcy filing rates. With unemployment running high, might we not see a huge increase in bankruptcy filings? I think not. Obviously, job loss contributes to many bankruptcies, but job loss does not create bankruptcies overnight. Rather, people typically struggle for two years or more before they file bankruptcy. I do think unemployment will prop up the bankruptcy rate, but I don't think it will make bankruptcies skyrocket. Moreover, unemployment can have countercyclical movements to the bankruptcy filing rate. A regular income is an express requirement for confirmation of a chapter 13 plan. For chapter 7, it is often a bad idea to file if one is unemployed and does not expect to be able to turn things around after the bankruptcy filing.
Finally, I need to issue a big caveat. For the past few years, bankruptcy filings have followed a predictable annual cycle. Right now, we are in the monthly periods of decline. Typically, the beginning of the year sees huge increases in the bankruptcy filing rate that are then sustained through the rest of the year. We will know a lot more about what bankruptcy filing rates will do in 2010 after we see what happens in January and February and even March. My estimates are based on past performance. If the near future returns us something different, then the estimates could be substantially off.