Credit Slips

Highly Questionable Medical Bankruptcy Figures from Fraser Institute

The National Center for Policy Analysis (NCPA) is flogging a study from the Fraser Institute in Canada that purports to show U.S. medical bankruptcies are a "myth" because the Canadian bankruptcy rate is higher than in the United States. Reuters and BusinessWire have run the NCPA's press release as a story on their news services. Before anyone takes this study seriously, a few important facts are needed to place the Fraser Institute findings in context. To be as charitable as possible, the study's use of the bankruptcy data is extremely selective.

First, the Fraser Institute study begins by observing that advocates of a single-payor U.S. health care system use the assumption that such a system would prevent many U.S. bankruptcies because of the medical debt found among many U.S. consumers filing for bankruptcy. The study states, "We should expect to observe a lower rate of bankruptcy in Canada compared to the United States, all else being equal." First, I'm not sure that is an assumption made by advocates of a single-payor system (and I don't count myself as one of them). Second, the qualifier "all else being equal" is the whole point. There is a lot that is not equal between the U.S. and Canada, and there is no reason to expect bankruptcy rates to be precisely similar. Even on its own terms, however, the Frasier Institute study is highly suspect because of the narrow window it uses for its bankruptcy data.

The Fraser Institute study, which is really just a three-page report of existing data from government sources, used bankruptcy filing data for the calendar years 2006 and 2007 as the "most recent data." Both the Office of the Superintendent of Bankruptcy Canada and the U.S. courts have 2008 data available. For a report that carries a July 2009 date, the years 2006 and 2007 would not seem to be the most recent data available. Authors have to prepare publications in advance of their appearance, but the U.S. data were available in a press release dated March 5, 2009, and the Canadian data appear on a web page that states "modified March 11, 2009." There was surely plenty of time to use the 2008 data for a 3-page paper that has fewer data than this blog post. By limiting the data to 2006 and 2007, however, the report is able to support that the anti-health care reform agenda that the NCPA and the Fraser Institute seem to further.

Bankruptcy Filings Decline 6% in June

The most recent bankruptcy filing data from Automated Access to Court Electronic Records (AACER) show a 6.1% decline in the U.S. daily bankruptcy filing rate. The were about 124,800 bankruptcy filings in June which, spread over the 22 business days in the month, is a daily bankruptcy filing rate of 5,672. In May, the daily bankruptcy filing rate was 6,038.

I do not take the dip in bankruptcy filings as strong evidence that the end of the recession is just around the corner. First, there is the usual caution against reading too much into the ups and downs of a monthly indicator. Over the past eight months, the bankruptcy filing rate went up four time and down four times, although cumulatively the increases have been more than the decreases. (The daily filing rate is 11.7% higher than eight months ago.) Second, although the month-over-month figure is a decline, bankruptcy filings are up sharply on an annual basis. The June 2009 figure is a 32.5% increase over 2008. Over the entire year, projections show that 2009 bankruptcy filings will be 28.2% - 36.4% greater than 2008. As I discussed last month, the long-term trend is toward the same filing rate as before the 2005 bankruptcy law was adopted. Third, bankruptcy filings lag macroeconomic bad news. Yesterday's news about the jump in unemployment shows the U.S. recession is far from over, and those unemployed may show up in the bankruptcy courts much later. People do not run into bankruptcy court the day they are laid off. in our most recent empirical work from the Consumer Bankruptcy Project, more than 50% of bankruptcy filers told us they struggled for more than two years before filing bankruptcy.

Projecting forward, total 2009 U.S. bankruptcy filings will be:

• 1,404,000 filings if bankruptcy filings continue for the rest of the year at the same daily rate (5,593 per day) as they have averaged for the first six months of 2009
• 1,414,000 filings if bankruptcy filings continue at the same daily rate (5,672 per day) as they have averaged for June
  
• 1,494,000 filings if bankruptcy filings for the remaining six months of 2009 constitute the same proportion of total filings as the last six months of 2008 constituted for total filings that year (about 53.2%)

May Bankruptcy Filings Climb to Over 6,000 Per Day

According to data from Automated Access to Court Electronic Records ("AACER"), there were over 120,000 U.S. bankruptcy filings in May 2009 or 6,020 for each of the 20 business days in May. That is the first time daily bankruptcy filings have topped the 6,000 mark since the 2005 bankruptcy law was adopted.

The May filing rate represented a 2.8% increase from the previous month and a year-over-year increase of 40.9%. The April daily filing rate had declined by 2.4%, meaning the increase in May just made up for the April decline plus a little more. The pattern for 2009 is consistent with recent years with monthly up and downs through the summer but no consistent increases until later in the year. It is important not to make too much out of the month-to-month changes in the bankruptcy filing rate. It is the long-term trend that matters, and the graph to the right shows how the long-term trend is heading us back toward the daily filing rate before the 2005 law was enacted.

AP Launches the Economic Stress Index

The Associated Press has launched the Economic Stress Index. Credit Slips readers will find it very useful and interesting. For a dataphile like myself, it's just plain cool. OK, it's not cool at all because it shows the tremendous depth and breadth of middle America's suffering. But, it shows what someone with real data know-how and computer graphic skills can do.

The Economic Stress Index "weighs three economic variables -- unemployment, foreclosures and bankruptcy -- to produce a score on a scale of 0-100 that measures how the recession is affecting a county compared to all others." You can scroll over each county and get a separate measure for each of the components or for the composite Economic Stress Index. The press release indicates the index and data will be updated monthly. Check it out.

Bankruptcy Filings Dip Slightly in April

April 2009 bankruptcy filings dipped slightly from March. The 2.2% decline keeps the calendar year 2009 in line with recent historical patterns of heavy filing increases in the first part of the year followed by no changes or slight declines for the summer and fall months. The bottom line is that the latest numbers continue to indicate a filing rate well above 1.4 million filings for the year and perhaps close to 1.5 million filings.

As always, the good folks at AACER have provided the April filing data, and they report 128,720 filings for the month of April. Spread over the 22 business days in April, that is 5,851 filings per day. Although the month-over-month data show a 2.2% decline, the April 2009 filing rate is 38.1% higher than the filing rate in April 2008. 2009.

Using the data we have so far in 2009, we can make some predictions about the rest of the calendar year. The United States will see:

• 1,366,000 filings if bankruptcy filings continue for the rest of the year at the same daily rate (5,462 per day) as they have averaged for the first four months of 2009
• 1,430,000 filings if bankruptcy filings continue at the same daily rate (5,851 per day) as they have averaged for April
  
• 1,490,000 filings if bankruptcy filings for the remaining eight months of 2009 constitute the same proportion of total filings as the last eight months of 2008 constituted for total filings that year (about 69.6%)

Chapter 13 Rate Down Sharply in March

The 2005 changes to the U.S. bankruptcy law were supposed to move more debtors into chapter 13 with the idea that they would have to pay at least a portion of their debts. In March, however, the chapter 13 rate dipped below the old chapter 13 filing rate. Not only do these latest figures suggest the 2005 law is not working as its supporters promised but also that the latest spikes in bankruptcy filing rates are from persons in the most desperate financial conditions.

Of the noncommercial petitions filed in March 2009, only 25.5% were chapter 13 cases. These data come from Automated Access to Court Electronic Records (AACER), which defines a "commercial" case as one that involves a corporation, limited liability company, or similar entity, one with an employer identification number (EIN) (instead of or in addition to a Social Security number), or one with a designation such as "doing business as" (d/b/a). All other cases are noncommercial cases.

From 2001-2004, the Administrative Office of U.S. Courts (AO) reported that 29.3% of nonbusiness cases were chapter 13s. "Nonbusiness" is not the same as "noncommercial." AACER uses a better, more comprehensive definition to calculate "noncommercial" cases, but if we look at all bankruptcy cases together, the numbers don't change much. The AO reports 28.7% of all cases as a chapter 13 from 2001-2004, and 25.0% of all cases in the AACER data during March 2009 were chapter 13s.

Bankruptcy Filings Rising Faster Than Expected

In March 2009, data from Automated Access to Court Electronic Records (AACER) report there were almost 131,000 total U.S. bankruptcy filings for a rate of 5,945 filings per business day. That is a 9.2% increase from February and a year-over-year increase of 38.1%. It also is a 17.0% increase from November 2008, just before the annual dip in filings during December and January.

Anyway you look at it, bankruptcy filings are rising dramatically. The 9% growth in March may not sound like much, but it is an annualized growth of 280%, meaning annual filings would almost triple if they grew 9% each month. The rate of increase also seems to be rising. It took us thirteen months to go from 3,000 filings per day to 4,000 and another nine months to go from 4,000 filings per day to 5,000. In March, we almost broke the 6,000 filings per day figure. If we go over 6,000 filings per day in April, as we appear poised to do, it will have taken only six months to break that new plateau.

Rising Pain in the Heart of Europe

Apparently, statistical agencies all over the world are finally releasing their 2008 bankruptcy data. The AOUSC released its CY 2008 report yesterday, and today, the German agency (DeStatis) released the report for December and CY 2008. As it usually does, DeStatis tried to paint a rosey picture--the headline is "7.1% fewer consumer bankruptcies in CY 2008." This seems to contrast quite nicely with the 31% rise in U.S. bankruptcy filings. But the DeStatis report reveals that business filings rose 13% from a year earlier, and non-business filings rose 12.3% in December 2008 over December 2007, nearly 13% for "pure" consumers (as opposed to former small-business people). The Q4 filings, especially December, show a rapid and troubling spike, and one suspects this will continue in force well into 2009. Hang on!

Bankruptcy Filings Spike in February 2009

The good folks at Automated Access to Court Electronic Records (AACER) sent some preliminary numbers on February 2009 bankruptcy filings, and the news is not good. The bankruptcy filing rate is at its highest rate since the 2005 changes to the U.S. bankruptcy law and are approaching the level they were at before the law's passage. The 2005 bankruptcy law made it more expensive and more hassle for consumers to use the bankruptcy system, and the return to pre-2005 bankruptcy filing levels shows how U.S. households are hurting. (A click on the image will open up a full-sized version.)

There were over 103,000 bankruptcy filings in February 2009. Spread over the 19 business days of February, the filing rate is 5,433 filings per day. The figure is a 22.0% jump over the January 2009 filing rate, although the better comparison is to the November 2008 filing rate because bankruptcy rates typically fall in December and January due to seasonal variations. As compared to November 2008, the increase is 9.8%, which is still a big jump for bankruptcy filing rates. The February 2009 filing rate represents a year-over-year increase of 29.9% as compared to February 2008.

The bottom line is that the declines in the bankruptcy filing rate we saw in December and January were temporary and due to seasonal variations. As they have for the past several years, the bankruptcy filing rate has again jumped in February. We seem to be well on our way to my predicted filing rate of 1.4 million bankruptcy filings for the 2009 calendar year. The American middle class is hurting, and its showing up in the bankruptcy courts.

Bankruptcy Filing Rate Declines for Second Straight Month: Not Necessarily Great News

The U.S. bankruptcy filing rate declined again in January 2009. This was the second straight month of declines, when bankruptcy filings are computed on a daily basis as should be done. Don't be fooled, however, into thinking the news is some suggestion that we are on the road to economic recovery. The decline is a seasonal aberration, and the data hint that the filing rate will again take off in the early spring, as has occurred in the past several years. Before we get to the likely trend, let me report the numbers.

According to data from Automated Access to Court Electronic Records (AACER), there were 89,037 bankruptcy filings spread over the twenty business days in the month of January. That is a filing rate of 4,452 filings per business day, which is a decline of 2.4% from the December 2008 rate of 4,563 filings per business day. The December 2008 rate was in turn a decline of 10.2% from the November 2008 rate of 5,078 filings per business day.

Chapter 11s Rise 62% in 2008

Yesterday, I posted about the increase in total bankruptcy petitions. Today, I want to focus on one particular subset of that figure and that is the number of chapter 11 petitions, which also are on the rise. Again, Automated Access to Court Electronic Records (AACER) has provided filing figures through the end of December 2008. According to these data, there were just over 10,000 chapter 11 cases in 2008 as compared to only 6,200 in 2007 for an increase of 61.5%. In 2008, chapter 11 petitions increased faster than the total number of bankruptcy cases, which rose 32%.

The headlines in the business press have recently reported on large bankruptcies like Circuit City and the Tribune Company. The businesses in those cases certainly employ thousands of people, owe investors millions of dollars, and rightfully deserve the attention they garner. These large bankruptcies represent only a tiny fraction, maybe no more than 2% of the chapter 11 cases that were filed in 2008. The typical chapter 11 is a much smaller business or is often the bankruptcy of a small business owner. Indeed, individuals filed 19.5% of all the chapter 11 cases in 2008. Many of these chapter 11s represent the lost dream of a small business owner and the jobs that went with that dream.

Bankruptcy Filings Rise 32% in 2008

Bankruptcy filings in 2008 rose 32% as compared to 2007 according to data from Automated Access to Court Electronic Records (AACER). There were just under 1.1 million total bankruptcy filings in 2008 as compared to 827,000 in 2007. Those figures count all bankruptcy filings. The increase is attributable not only to the worsening economic conditions, especially the unavailability of further credit, but also to the generally increasing trend of bankruptcy filings from their nadir just after passage of the 2005 bankruptcy law.

During the last month of 2008, bankruptcy filings actually declined as compared to the previous month. In December 2008, there were 4,543 filings per business day, a decline of 10.5% from November 2008 when filings per business day were 5,078. (See the data note below for an explanation about the December 2008 calculation for filings per day). The decline follows a historical pattern of declining filings in the month of December and is not surprising. As the graph to the right shows, both December 2006 and December 2007 showed declines in filings as compared to the previous month.

The 10.5% decline of December 2008 is larger than the declines in December 2006 (0.5% decline) and December 2007 (6.4% decline), but I think that is likely because of the large increases in October and November 2008. Rather than representing some heretofore undetected brightening of the economic picture, bankruptcy filings declined more dramatically in December 2008 than in previous years because they had further to fall. The economic news continues unabated with a bleak outlook, and there is no reason to think the December 2008 decline is anything more than a repeat of the usual pattern.

In my last post on bankruptcy filings, I projected a little under 1.4 million total filings for the 2009 calendar year, and there is nothing in the December numbers that would make me back away from that prediction. In the short-term, I expect bankruptcy filing rate increases in January and February 2009.

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.

Bankruptcy Filing Rate Climbs Slightly in November

Don't let other headlines fool you. On a daily basis, the bankruptcy filing rate rose in November and went over 5,000 for the first time since the 2005 changes to the U.S. bankruptcy law. The 91,355 filings in November were a decline in absolute numbers from October, but spread over a month with only 18 business days, that's a daily filing rate of 5,075 and a 2.6% increase from October. If we don't count the day after Thanksgiving as a business day, the November filing rate represents an 8.6% over October. As always thanks to Automated Access to Court Electronic Records (AACER) for the data.

The November daily filing rate of 5,075 is an increase of 36.9% over the same time period the year before. The short-term trend over the past few months is a big part of the increase. The November 2008 increase in the bankruptcy filing rate comes on the heels of increases in July (2%) August (2%) September (2%) and October (8%). Remember that even small monthly increases compound to large annual increases. For example, if bankruptcy filings rose 2% each month, that translated into a 29% annual increase. The tightness of credit and the overall economy are the reasons for the increases in the bankruptcy filing rate.

With only one month left in the year, it doesn't take advanced math to estimate total bankruptcy filings for the 2008 calendar year. We are just a few hundred bankruptcies short of 1,000,000 for the calendar year, and we can expect about 100,000 filings in December. For the record, however, in 2008 we will have:

• 1,095,000 filings if bankruptcy filings continue for the rest of the year at the same daily rate (4,347 per day) as they have averaged for the first eleven months of 2008
• 1,112,000 filings if bankruptcy filings continue at the same daily rate (5,075 per day) as they have averaged for November
  
• 1,086,000 filings if bankruptcy filings for the remaining month of 2008 constitute the same proportion of total filings as the last month of 2007 constituted for total filings that year (about 7.9%)

Bankruptcy Filings Spike in October

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.

Ratio of Chapter 13s Is Declining

A centerpiece of the 2005 bankruptcy law was to force more debtors into chapter 13. The credit industry claimed many debtors were abusing the process by filing chapter 7 when they could at least make a partial repayment to creditors in chapter 13. So far, the law has not had much effect, and the trend suggests it will not be too long before the chapter 13 rate is precisely what it was before the 2005 law passed.

Most consumers will file either a chapter 7 or chapter 13 bankruptcy. In chapter 7, the bankruptcy trustee sells all nonexempt and unencumbered assets and distributes the proceeds to creditors, and the debtor receives a fresh start. In chapter 13, the debtor devotes all of his or her disposable income to payment of creditors over a 3- or 5-year plan, and any unpaid portions of the debts are discharged. Which option is most appropriate for a debtor will depend on many factors. If I have not overgeneralized too much already, another overgeneralization is that chapter 13 can be more effective at protecting your current assets, like your home, while chapter 7 can be more effective at protecting your future income.

From 2001-2004, the Administrative Office of U.S. Courts (AO) tells us that 29.3% of nonbusiness debtors filed a chapter 13 instead of a chapter 7. Data from Automated Access to Court Electronic Records (AACER) shows that 33.4% of noncommercial debtors filed chapter 13 instead of a chapter 7 in September 2008. The graph to the right shows the trend since March 2006. If the trend continues, we will soon be very close to the same ratio of chapter 13s as we had before the 2005 law.

Bankruptcy Filings Reset Post-2005 Record

September 2008 bankruptcy filings are up 1.9% from the previous month and up 28.8% from the same month one year before. That is an annual growth rate of 25.3%. Those figures represent an average of 4,574 bankruptcy petitions were filed for every business day in September. The total number of bankruptcy petitions filed in September was 96,049. As always, many, many thanks to the good people at AACER who make these monthly updates possible.

As the line graph shows, bankruptcy filings have been increasing steadily over the past twenty-one months. In fact, the bankruptcy filing rate in September 2008 is 65.6% higher than it was in January 2007. September 2008 was the third straight month in a row that bankruptcy filings reset the post-2005 record for the monthly filing rate. The bankruptcy filing rates here are daily rates. When I calculate monthly filing rates, I always look at them on "filings per business day" basis because the total number of filings in a month are very sensitive to the total number of business days.

The estimate for the total number of bankruptcy in the 2008 calendar year keeps creeping closer to 1.1 million. For the 2008 calendar year, bankruptcy filings will be:

• 1,060,000 filings if bankruptcy filings continue for the rest of the year at the same daily rate (4,208 per day) as they have averaged for the first nine months of 2008
• 1,083,000 filings if bankruptcy filings continue for the same daily rate (4,574 per day) as they have averaged for August 2008
• 1,092,000 filings if bankruptcy filings for the remaining three months of 2008 constitute the same proportion of total filings as the last three months of 2007 constituted for total filings that year (about 26.89%)

I think the lower estimate is probably unrealistic because the daily filing rate would have to drop over the last three months of the calendar year, and that is unlikely given the current economic situation. I make these estimates each month, and the upper bound has generally hovered about 1,080,000 to 1,090,000. It looks like we may just miss 1.1 million filings for the calendar year but just barely. If the economic crisis causes bankruptcy filings to surge even slightly, we'll go over the 1.1 million mark easily.

What Happens to Homeowners in Bankruptcy?

Amending bankruptcy law to permit judges to modify home loans for chapter 13 debtors does not seem to be gaining traction in Congress, despite the fiasco with the bailout vote and pressure to incorporate more "Main Street" provisions. For many reasons, I remain convinced that any bailout should attempt to limit losses at the family-level, rather than addressing only the end consequences for major financial institutions. That said, does filing bankruptcy improve a family's chances of saving its home?

A new paper, The Homeownership Experience of Households in Bankruptcy, by economists Sarah Carroll and Wenli Li provides a tenative answer to this question. Before summarizing the findings, let me emphasize a few key points. The paper's sample comes from Delaware. Yup, that's it. That limits my confidence, and to their credit, the authors' confidence, about extrapolating these findings to the whole nation. Another difficulty is that the housing market has changed so rapidly that despite the authors' quick production of this study, the mortgages of today's families may look very different from those of families that filed bankruptcy in 2002. Keeping those qualifications in mind, what do Carroll & Li report on how many homeowners that file bankruptcy avoid foreclosure.

Bankruptcy Filings Reach New High in August

The U.S. bankruptcy filing rate climbed again in August, reaching a new post-2005 high of 4,476 filings per day. The year 2005 is significant because it was the year that the bankruptcy law changed making it more expensive and more time-consuming to file bankruptcy as well as making bankruptcy less effective once debtors got to bankruptcy court. Despite these changes, the bankruptcy rate has become staggeringly high, and we appear to have returned to an era where we will have well more than 1 million annual bankruptcy filings.

By almost any estimate, bankruptcy filings will be over 1 million for this year. For the 2008 calendar year, bankruptcy filings will be:

• 1,049,000 filings if bankruptcy filings continue for the rest of the year at the same daily rate (4,160 per day) as they have averaged for the first eight months of 2008
• 1,075,000 filings if bankruptcy filings continue for the same daily rate (4,476 per day) as they have averaged for August 2008
• 1,080,000 filings if bankruptcy filings for the remaining four months of 2008 constitute the same proportion of total filings as the last five months of 2007 constituted for total filings that year (about 34.9%)

The August filing rate of 4,476 filings per day is 2.2% higher than July 2008 when the filing rate was 4,381 filings per day. Although the total number of filings in August (93,987) is actually less than it was in July (96,385), it is the daily filing rate that is most important. The total number of bankruptcy filings in a month is sensitive to the number of business days in the month, and July had an extra business day as compared to August.

Bankruptcy Filings Jump in July, Highest Since 2005 Law

Bankruptcy filings jumped in July to their highest level since the 2005 changes to the U.S. bankruptcy law. According to the latest figures from Automated Access to Court Electronic Records (AACER), there were 96,355 filings in July 2008 for a daily filing rate, spread over 22 business days, of 4,380. That is a 2.4% jump from the previous month and a 33.2% increase from the same time period one year ago.

Headline mongers can make the monthly jump look even bigger. In terms of raw numbers, July bankruptcies were up 7.3% from the previous month. That calculation, however, ignores the fact that July had one more business day, and when comparing monthly filing numbers, they are very sensitive to the number of business days in a given month. Careful reporting will focus on the daily filing rate rather than the total number of filings for the month of July.

Although I think it is wiser to look at long-term trends rather than monthly changes in the U.S. bankruptcy filing rate, the July figures surprised me. Since the 2005 bankruptcy law had gone into effect and even before that, the summer months had seen a relative plateau for bankruptcy filings with few monthly increases. The July figures buck that trend and are a rare summer increase in the U.S. bankruptcy filing rate. I'll be watching the August figures with great interest. Another increase there will be cause for significant concern and will be yet another sign of increasing economic pressures on American households.

In terms of filings for the 2008 calendar year, the July figures are starting to move the prediction toward the 1.1 million mark. It's looking more and more certain that there will be more than 1,000,000 bankruptcy filings. Specifically we will have

• 1,037,000 filings if bankruptcy filings continue for the rest of the year at the same daily rate (4,116 per day) as they have averaged for the first seven months of 2008
• 1,064,000 filings if bankruptcy filings continue for the same daily rate (4,380 per day) as they have averaged for July 2008
• 1,092,000 filings if bankruptcy filings for the remaining five months of 2008 constitute the same proportion of total filings as the last five months of 2007 constituted for total filings that year (about 44.2%)

Stay tuned.

The Slow Road to Recovery

Lois Lupica, a bankruptcy professor at the University of Maine, has co-authored A Study of Consumers' Post-Discharge Finances: Struggle, Stasis or Fresh Start, (spring 2008 issue of the American Bankruptcy Institute Law Review) on the long-term consequences of filing bankruptcy. Using data from a large national sample (the National Longitudinal Survey of Youth 1979), Lupica and Zagorsky report that among the study's cohort (people who are now in their mid-40s), 13.7% have filed a bankruptcy case. The core of the analysis is a comparison of bankruptcy filers and non-bankruptcy filers in the sample to examine whether debtors recover after bankruptcy, and importantly, how long that process might take. The findings are mixed.

As a group, bankruptcy filers are more likely to be divorced, female, less educated, live in an urban area, and have a bigger family than those who report not having filed bankruptcy. These data are largely consistent with the prior research of Dr. Teresa Sullivan, Elizabeth Warren, and Jay Westbrook about the characteristics of families at the time of their bankruptcy. However, people who have filed bankruptcy, even years ago in the past, continue to earn much lower wages than those who have never filed bankruptcy. In short, below-average income is a troubling, but enduring, quality of families who seek bankruptcy relief. This conclusion dovetails with the work that Deborah Thorne and I did on the one-year outcomes from chapter 7 bankruptcy, which suggested the importance of stable or rising income to a fresh start. As Lupica & Zagorsky admit, their sample is people in their mid-40s. The trajectory of recovery could look different for people who file bankruptcy later in life or could be different for post-BAPCPA debtors or even for those who filed in the early 1990s as opposed to those who filed in the last few years because of a changing social safety net. More work is needed, but this study single-handedly doubles our collective research on the longitudinal effects of bankruptcy. It's well worth a read.

Consumer Protection and Bankruptcy; How Do They Relate?

Every other year Richard Alderman holds an extraordinary conference at the University of Houston Law School for faculty from around the world who teach in the consumer law area. It mixes a super learning experience with networking and with a lot of fun. Most of the folks in attendance do not teach in the bankruptcy area but at each of the last two conferences there has been a healthy minority of people who teach in both fields. So, what is the relationship between consumer protection faculty and bankruptcy faculty and what should it be?

Enjoyable but not Educational? Debtor Financial Management

In May, the Executive Office for the U.S. Trustee released another of the studies mandated by the new bankruptcy law. I expressed optimism in this symposium piece that this research may be a bright spot to emerge from BAPCPA but the results so far have been quite mixed (the pretty good and the awful). The latest study purports to evaluate the postbankruptcy financial education that all individuals with consumer debts are required to complete to receive a discharge. The study considered three curricula: one developed by the Chapter 13 trustees (TEN), one developed a private credit counseling agency, and the EOUST's own program.

Across these providers, 97 percent of bankruptcy debtors reported that they would recommend the program to others and 97 percent agreed with the statement that their overall ability to manage their finances had improved as a result of the educational course. This is consistent with a finding from the Consumer Bankruptcy Project that Dr. Deborah Thorne and I reported here--debtors seem to believe that financial education is useful. However, there were very, very few measurable improvements in debtor's actual financial knowledge after the course and only about 22 percent of debtors who could be interviewed three months later had adopted any recommended change to their financial practices. The findings seem to suggest that while financial education makes people feel optimistic about their financial prospects, it may have a much, much more limited effect on knowledge and behavior. The policy take-away remains ambiguous. Like so many other things, whether bankruptcy financial education continues will probably turn more on politics and public perception than hard evidence in either direction.

Revisiting Increases in the Bankruptcy Filing Rate

From time-to-time, I try to check how the bankruptcy filing rate is changing around the country. We know bankruptcy rates are going up nationally, but looking at variations by geographic region tells us something about how different parts of the country are doing economically.

The map to the right is my latest effort. You have two choices at this point -- (a) magnifying glass or (b) turn off your pop-up blocker and click to get a larger version of the map. The map shows increases in the bankruptcy filing rate by federal judicial district comparing May and June 2008 bankruptcy filings to the same period one year previously. I used two months of data to minimize the effect one particular month's results would have. The boundary lines for federal judicial districts are not necessarily a perfect geographic unit for these purposes, but they do  tend to provide large enough geographic units within state to allow for some localized comparisons. For example, they distinguish between northern and southern California.

The map is color coded by decile. There are ninety judicial districts in the fifty states plus the District of Columbia. Hence, each decile represents nine districts.

Bankruptcy Filing Fees Through the Ages

The cost of everything keeps rising, even the cost of going broke. When something costs more, people use less of it. I've been thinking lately about that idea and how it relates to the U.S. bankruptcy filing rate.

The filing fee for a chapter 7 bankruptcy is now $299, which is a 43% increase from the cost just before the 2005 changes to the bankruptcy law took effect. Chapter 13 filing fees are now $274, a 41% increase from 2005. Those increases would help to explain why U.S. bankruptcy filings remain at historically lower levels. For example, I project that there will be slightly over 1.0 million filings in the 2009 calendar year as compared to about 1.6 million filings in the years immediately preceding the 2005 bankruptcy law.

I recently had occasion to compile the rising cost of chapter 7 or 13 filing fees since the Bankruptcy Code's became law in 1979. Sure, attorneys' fees are the big cost of filing bankruptcy, and with one of my great research assistants, Heather Miller, I'm working on a paper that quantifies how the 2005 bankruptcy law changed the total cost of filing. (Heather probably would be more pleased if I worked on the draft instead of blog posts.) As part of that work, I felt compelled to see how one component of the cost of bankruptcy, filing fees, had changed and felt even more compelled to share it with all you.

U.S. Bankruptcy Filing Rate Holding Steady

The U.S. bankruptcy filing figures through June 30, 2008, have become available courtesy of Automated Access to Court Electronic Records (AACER). For June, the bankruptcy rate was 4,275 new filings per day. After a large increase in February and again in March when the daily filing rate hit 4,303, the rate has stayed fairly constant throughout April (4,236 filings/day), May (4,268 filings/day), and now June.

Do these latest figures mean the U.S. economy is recovering? Probably not. First, although the filing rate has been basically constant from March - June of 2008, the filing rate for those four months put together (4,270 filings/day) is 32% higher than for the same four months in 2007 (3,233 filings/day). Second, bankruptcy filings tend to lag the economic conditions that create them by at least a year and often longer. Today's economic conditions won't show up in the bankruptcy filing rate until much later. Third, the March - June 2008 plateau is consistent with patterns in the past few years. Given what we have seen the past few years, I expect the bankruptcy filing rate will stay roughly constant through the remainder of the summer and into the fall, perhaps even declining slightly in the late fall. At the beginning of 2009, we should see another increase in the filing rate.

May 2008 Bankruptcy Filings Continue to Show Increase

The latest bankruptcy filing data have just become available from Automated Access to Court Electronic Records ("AACER"). Where we were just treated to a round of headlines about the government's data that went through March, the AACER data bring us current with May data.

According to AACER, there were 89,560 total bankruptcy filings (of all types) in the month of May. With 21 business days in May, that is a daily rate of 4,266. That figure represents an increase of 34% from the daily rate in May 2007. This is no one-month blip in the data. The daily bankruptcy filing rate for the first five months of 2008 (4,026 per day) is 30% higher for the first five months of 2007 (3,093 per day). So far, there have been almost 423,000 bankruptcies filed in 2008.

Foreclosures and More Bankruptcy Filings

It is popular to assume the increases in the bankruptcy filing rate are tied to the home mortgage foreclosure crisis here in the United States. Is that really the case? I've checked the data, and it appears that it is.

The map to the right looks at individual federal judicial districts to show the increase in the average daily bankruptcy filing rate from the first four months of 2007 as compared to the first four months of 2008. I used a four-month average of data so that the results were not affected by any one month. The map shows all federal judicial districts where bankruptcy filings increased more than 20%. As always, the bankruptcy filing data are from our good and reliable friends at Automated Access to Court Electronic Records ("AACER"). Yeah, I know the map is hard to read, but clicking on the map should give you a pop-up window with a much bigger version. If that doesn't work, squinting is always an option, but you don't need to squint much to see the big patterns.

Why I Use AACER's Filing Statistics

Every month, I try to post on the latest bankruptcy filing statistics using data provided by a private company, Automated Access to Court Electronic Records (AACER). Recently, Jason Kilborn, a law professor at Chicago's John Marshall Law School, posted a comment asking why AACER's filing statistics were lower than the ones provided by the Administrative Office of U.S. Courts (AO). For example, AACER reported 826,665 bankruptcy filings in the 2007 calendar year, about 2.9% lower than the 850,912 filings reported by the AO.

The differences seem to stem from the AO's including a old but reopened bankruptcy case in its count of bankruptcy filings where AACER's data only counts new filings. The AO data also appear to count transferred cases. Thus, for new filings, AACER's statistics are the ones to use. Besides, as I have mentioned previously, the AO's data come out woefully late, as much as three months after the fact. AACER is able to provide timely data.

Without access to the AO's data to audit and compare their data to AACER's data, I only can say that the difference "seems" to be explained by the way the AO counts reopenings and transferred cases. But why do I hold this belief?

Still on Target for 1,000,000 Bankruptcy Filings

While I was busy with last week's Debtor World conference, the April 2008 bankruptcy filing figures became available from AACER. If I wanted to be sensational, I could compare the latest figures to the 2007 figures and tout how filings are up over 37% from the previous year. Or, I could compare the April 2008 total of 93,096 to the March figure and note filings climbed 3% in one month. Although both of those calculations are technically correct, they also are misleading.

On a daily basis, filings were 4,232 for each business day in April as compared to 4,301 for each business day in March. That is a slight decrease (a 1.6% decrease to be exact). Does this mean that filings are easing off? Not really. In recent years, April filings per day have been roughly the same as March. In fact,  if the past patterns hold, daily filings will hold steady until October or November when they again will climb. The calculations still suggest we'll see over 1,000,000 bankruptcy filings for all of 2008.

Gathering Your Private Information for Private Gain

Professor Elizabeth Warren’s (Harvard) paper, Balance of Knowledge, questions why academics do interdisciplinary work at all. But, she easily answered that question.

She noted the role that empirical data played during the BAPCPA discussions. She mentioned both the influence of the now-discredited $400 bankruptcy tax and also the study conducted by Creighton Law School Professors Marianne Culhane and Michaela White and how the Culhane/White study caused Congress to narrow the scope of the means test. She also discussed the way data has been used in the current mortgage policy debates. Professor Warren mentioned as well that Congress appears to be warming to the idea that empirical data has value, since credit card bills currently pending in Congress all have provisions that require credit card companies to make more data publicly available.

Data, Data, Data

Provost (at Michigan) Teresa Sullivan presented the second paper of the morning, Debt and the Simulation of Social Class. She opened by repeating two conversations she heard while waiting at the airport yesterday. One involved a couple that was concerned that one of their neighbors might lose their home, and might have to file for relief under Chapter 13 of the US Bankruptcy Code. The second conversation involved parents who were discussing their child, a soon-to-be-college graduate, and the amount of student loan debt the child had. This debt level, the parents feared, would effect the type of job their child would be able to have, at least until the loan debt was repaid. She then observed that while debt is clearly on the mind of many people, it’s not a topic that has really concerned most sociologists (other than the ones who are attending the conference!)

Lubben on Corporate Bankruptcy Costs

Professor Stephen Lubben of Seton Hall University (and a former Credit Slips guest blogger) has recently published the findings from his massive study of professional fees in corporate reorganizations. The paper appears under the very descriptive title of "Corporate Reorganization & Professional Fees" in volume 82 of the American Bankruptcy Law Journal at pp. 77-139. This paper will be a standard reference on corporate bankruptcy costs.

Lubben reports on a dataset of 1,026 cases that filed chapter 11 in 2005 in thirty-three separate judicial districts. Among Lubben's key findings:

• Courts rarely deny applications to retain professionals and rarely reduce professional fees
• Time in bankruptcy is not related to the level of professional fees
• Professional fees in chapter 11 are subject to economies of scale (i.e., larger bankruptcies result in a lower percentage of value being devoted to professional fees)
• Thirty-five percent of chapter 11 cases result in no payments to professionals whatsoever.

You'll have to read the study for the details. Professionals who work in chapter 11s and who like to get paid will want to do so. It contains a lot information about the expectations for the costs of an average chapter 11. In a "big case subsample," Professor Lubben provides separate data for the biggest corporate reorganizations.

I'm not quite sure how one goes about getting a copy of the study. The American Bankruptcy Institute, which provided the funding for Professor Lubben's study, was selling a CD-ROM with the study's contents. Full disclosure notice: I served on the advisory committee for Professor Lubben's study.

UPDATE (4/21): Professor Lubben wrote me to say a copy of the paper is available on SSRN here.

Monthly Filings, Jan. 2006 - Mar. 2008

A reader asked about the total U.S. bankruptcy filings for a month earlier this year. Looking around, I found I had not updated those figures in a while, and I thought others also might have a use for those figures. Thus, presented without analysis and for everyone's convenience is this table with those figures, running from January 2006 to March 2008. The figures are for total U.S. bankruptcy filings. Clicking on the table should bring up a larger, more legible version.

The data are from Automated Access to Court Electronic Records (AACER). Over the past two days, there  have been news stories about the latest data from the Administrative Office of U.S. Courts (AO). The AO's  data are three and a half months old, from the last quarter of 2007. AACER's data are much more current.

Bankruptcy Filing Rates by District, Apr. 2006 to Mar. 2008

The March 2008 bankruptcy data showed that the U.S. average filing rate went over 4,000 per day for the first time since the 2005 bankruptcy. Bankruptcy filings have been steadily rising since the 2005 law's effective date, but national trends can mask local variation. Although bankruptcy data often is aggregated by state, it easily can be broken down to a little bit finer level. Bankruptcy filings are readily available by federal judicial district, for which there are ninety in the fifty states. Some districts occupy an entire state, but looking at districts allows us to see variation within a particular state. As always, these data are courtesy of Automated Access to Court Electronic Records (AACER).

The map to the right shows how bankruptcy filings have increased from April 2006 to March 2008 in each of the ninety federal judicial districts. Yeah, I know, it's really small and illegible, but clicking on the map should open up a much bigger version. The states are color coded into deciles of growth, with the legend appearing in the lower right-hand corner. It won't be the greatest map you'll ever see, but I think it will serve the purpose. Also, no criticism of the selections of color codes will be brooked. I have a heck of time dressing myself in the morning--somebody could make a lot of money selling me Garanimals for Adults--and a coordinated color palette is too much to expect from me.

Before diving into what the heck this all means, a few caveats and explanations are in order. First, I picked April 2006 as the comparison date because it seemed like the first month after the 2005 bankruptcy law during which filings had returned to a somewhat normal pattern. Picking a different date, of course, could produce a different result. Second, every district in the country has had an increase in filing rates since 2006. Thus, even the tenth decile still represents an increase. It's just less of an increase than any other decile. Finally, consider that deciles are a convenient way to group, but they can be arbitrary cutoffs. For example, dividing ninety judicial districts into deciles means the 9th and 10th highest districts are grouped into different deciles. The map is best understood and used for its patterns.

More Than 4,000 Bankruptcy Filings Per Day in March

For the first time since the 2005 changes to the bankruptcy law (BAPCPA), the U.S. bankruptcy filing rate went above 4,000 per day in March 2008. There were 90,288 total bankruptcy filings spread over twenty-one business days in March for an average daily filing rate of 4,299 bankruptcy filings. The March 2008 filing rate is an 8.6% increase over the previous month (February 2008 with 3,969 filings per day) and a 29.4% increased compared to one year previously (March 2007 with 3,322 filings per day). As always, these statistics come courtesy of Automated Access to Court Electronic Records (AACER).

Are Bankruptcy Filings Highest at the End of the Month?

REVISED 3/19: Courtesy of Automated Access to Court Electronic Records ("AACER") come new data about the U.S. bankruptcy filing rate throughout a month. From January 2007 through February 2008, the average daily filing rate for the first 14 days of the month has generally been higher than for the entire month. These data would suggest that bankruptcy filings tend to clump at the beginning end of the month.

This is a completely revamped post on the topic. I had misread the data that were initially sent to me as showing the opposite. The clumping at the end of the month, rather than the beginning of the month, makes more sense to me.

It is still important to note that these data represent only 14 months of filings. Also, an end-of-the-month filing clumping, that is consistent with the general trend of an ever-increasing filing rate. Still, the end-of-the-month increases are higher than the overall monthly increases suggesting that general trend cannot explain all of the clumping effect. If bankruptcy filings do clump at the end of the month, the reasons for this clumping may help us understand the trigger of why people choose to file bankruptcy at a particular point.

Although the clumping may seem like it is coming at the end of a month, it may actually be a beginning-of-month effect. One thing to appreciate is that bankruptcy filings do not happen instantaneously at the moment someone first consults an attorney. In a completely unscientific survey this morning on the Bankr-L e-mail list (see signup instructions to the right), I asked bankruptcy attorneys for their estimate of the typical number of days that it takes for a routine consumer bankruptcy filing to occur from the moment of initial consultation to filing. Sixteen attorneys responded, and the median answer was about 12 days. Eight of the responses specifically mentioned the great variance in time, and five of the answers stressed that the date of the bankruptcy filing is often dependent on when the debtor can scrape together the money to pay the attorneys' and filing fees. In fairness, I should stress again that 12 days was only the median. The range was large, with two responses suggesting that the typical case took about six months from consultation to filing. The mode (or most common) response was 10-14 days.

February 2008 Filing Rates Hit Post-BAPCPA High

This just in. Bankruptcy filings in the U.S. are now at their highest daily rate since the 2005 changes to the federal bankruptcy law. According to Automated Access to Court Electronic Records (AACER), there were 79,198 bankruptcy filings in February 2008. Spread over the twenty business days in February, that is 3,959 filings per day. That's a 28% increase over the same time period one year before and an 18% increase over January 2008. Is this a big deal? Yes and no.

Some persons may seize on this news as further evidence of the decaying economy but that would be a mistake. There may be plenty of evidence that the U.S. economy is headed toward recession, but the February 2008 bankruptcy filing rate alone should not be taken as part of that evidence. Put simply, the monthly filing bankruptcy rate goes up and down. One month of data does not tell us a lot by itself. Perhaps more importantly, the monthly bankruptcy filing rate has a lot of cyclicality, and bankruptcy filing rates tend to rise in February (as discussed here). While we shouldn't overreact to this news, we probably also should not dismiss it either.

30-70%? -- Probably Not the Real Rate of Mortgage Fraud

I've been catching up on some reading and again found the statistic that 30% to 70% of early payment defaults on home mortgages can be linked to significant misrepresentations borrowers made on their loan applications. This most recent time I saw the statistic cited as coming from the U.S. Federal Bureau of Investigation. Enough! Can we stop this?

This statistic is misleading and when presented as a fact makes it seem like there is an easy solution to the mortgage crisis, which would be to let the fraudfeasors get the fate they deserve. If those numbers seem too high to you, it's because they likely are.

The December Effect

Most every month, I write up a post with some thoughts about the latest monthly filing statistics from AACER. I've always been a little hesitant about those monthly updates because a focus on the monthly ups and downs doesn't really tell us much about how, say, August was compared to July. If we measured filing data on a daily basis, we wouldn't say that Tuesday was a better day than Monday because there were fewer bankruptcy filings on Tuesday. The same is likely true for the monthly data measure too small of a time period to be able to say much about how one month compares to the next. Consumer financial distress unfolds over a longer time period than to be accurately captured by monthly financial data.

In addition to these concerns, one thing that drives me bats is when I see media reports about monthly bankruptcy filings that fail to adjust for the number of business days in a month. While it is true that electronic court filing means that bankruptcy filings can occur any day of the week, the number of business days in a month will be the primary driver of month-to-month changes in the filing rate.

Properly adjusted, the monthly data are useful for looking at longer trends and for trying perhaps to find recurring patterns. It has only been fairly recently that we have had good monthly data. I've only been able to get monthly data going back to January 2004, some from the Admin. Office of U.S. Courts and some from AACER. (By the way, if anyone has monthly filing data going back farther, I would be ever so grateful if you would let me know.) Looking at these monthly data, I am wondering whether we maybe don't have an annual pattern where filings fall in November and December, surge again in early spring and then plateau again in the summer.

Bankruptcies Continue Their Slow, Upward Pace

We ended the year 2007 with 826,665 total bankruptcy filings, according to the data from Automated Access to Court Electronic Records (AACER). This figure represents a 39.9% increase over 2006, but the 2006 figures were affected by the huge surge of filings October 2005 to beat the effective date of the new bankruptcy law. The 2005 surge created a trough in demand for bankruptcy filings that continued into the first part of 2006.

What we can say is that bankruptcy filings appear that they will continue their upward trend since the 2005 law's enactment. For example, in December 2007 and January 2008, total bankruptcy filings per filing day were both about 3,300 as compared to around 2,700 for the same period a year ago. As I wrote a few months ago, I think the rate of increase in bankruptcy filing rates has been leveling off, but overall it's still an upward trend. The trend line alone suggests that there it looks like there will be more than 1,000,000 bankruptcy filings in 2008. Tightening credit markets mean both consumers and business will have much less ability to use further borrowing as a way to stave off the day of financial reckoning. Thus, I think the conditions are right for the United States to continue to see rising bankruptcy rates and again go over 1,000,000 total annual filings.

Even the US Trustee Has an Occasional "Credit Crunch"

On January 14, 2008, the US Trustee announced that it has suspended audits of consumer debtors. While consumer advocates have criticized the audits as overzealous and unnecessary, the temporary end of audits occured for a simple (if somewhat, ironic, reason)--the US Trustee is out of money. The 2008 Appropriations Act didn't provide any funding for debtor audits, and consequently the US Trustee has stopped the audits. While the Financial Services Roundtable, a credit industry lobby group, says "nobody" benefits when the watchdog is taken off the job, I suspect many in the consumer bankruptcy bar will applaud the audits' current status as an unfunded mandate.

Debt Slavery? Correlation of Slavery with Chapter 13 Filing Patterns

Looking at Bob's posting of chapter 7 and 13 filing rates, I couldn't help but notice the correlation between high chapter 13 filing rates and states in which slavery was legal until 1863 (the "South" broadly speaking). The 11 jurisdictions with the highest rate of chapter 13 filings (and all of those with over half the filings being 13s) were slave states. The top 9 (and but for Lincoln imposing martial law in Maryland, the top 11) states were all part of the Confederacy. With a few of exceptions, all former slave states were in the top 15.

What are we to make of this this correlation?

Did the 2005 Law Make for More Chapter 13s?

In my last post, I discussed whether the chapter 13 rate in different states told us much about the mortgage crisis. Short answer: not really. The problem is the assembling the time it would take to assemble the statewide chapter 13 rates going back historically. The national trend in the chapter 13 filing rate is not as difficult to assemble, and it reveals an interesting pattern. The proponents of the 2005 U.S. bankruptcy law said it would force more people into repayment plans in chapter 13 rather than taking the "easy way out" in chapter 7.

The graph shows the monthly changes in the chapter 13 filing rate since January 2004 through November 2007. The data are from the Administrative Office of U.S. Courts except for October and November 2007, which are from AACER. The month the 2005 bankruptcy law went into effect should not be hard to spot. The percentage of cases that were chapter 13 filings spiked immediately after the law went into effect, but the spike was aberrant. Immediately before the 2005 law went into effect, people rushed to file to beat the law's harsh provisions. It made more sense to beat the law's effective date if one intended to file chapter 7 rather than chapter 13. Thus, the big spike after the 2005 law's effective date represents the absence of chapter 7s rather than a rush toward chapter 13. As bankruptcy filings have continued their steady climb (discussed in previous posts gathered here) and looking again to be over 1,000,000 in 2008 (see here), the chapter 13 ratio has been trending back toward the same levels as before the 2005 bankruptcy law.

Still, even a casual inspection of the graph will tell us that the levels are not the same. Where a little over 30% of all bankruptcy filings were chapter 13s before the 2005 law, a little under 40% of all filings are now chapter 13s. The precise figure for November 2007 was 38.8% as compared to 32.2% in January 2004. Two years after the 2005 bankruptcy law went into effect, there seems to have been a slight shift toward more chapter 13s. In my previous post, I said that one really needed longitudinal data to get a handle on how the home mortgage crisis is interacting with bankruptcy filing rates. One wonders whether the persistence of the slightly increased chapter 13 rate might be partly attributable to homeowners filing chapter 13 to save their homes during the mortgage foreclosure crisis.

Does the Chapter 13 Filing Rate Tell Us Anything About Mortgage Foreclosures?

A few days ago, I had the bright idea of looking at the chapter 13 filing rate in the different states and seeing if that told us anything about what might be happening with home mortgage foreclosures. Generally speaking, homeowners often will find it easier to save a home in chapter 13, and thus changes in the chapter 13 rate could give us some understanding of the financial distress being caused by the home mortgage crisis. It's a nice theory, but in practice the data are unilluminating on that point. There is great variation from state-to-state in the chapter 13 rate, making it difficult to draw meaningful conclusions from the data.

Nationally, 38.8% of all November 2007 bankruptcy filings were chapter 13s, but the table shows the national figures masks considerable state variation. (The data are courtesy of AACER.) Bankruptcy experts will not find the state variation very surprising. In an 1993 article, Professor (and upcoming Credit Slips guest blogger) Jean Braucher documented how consumer bankruptcy attorneys can influence chapter choice. (See Braucher, 1993. "Lawyers and Consumer Bankruptcy: One Code, Many Cultures," American Bankruptcy Law Journal, 67:501-83.) On the heels of that article, Professors Teresa Sullivan, (Credit Slips blogger) Elizabeth Warren, and Jay Westbrook described important variations in bankruptcy practice that could not be explained by difference in formal rules but rather were likely the byproduct of differing cultures by local professionals. (See Sullivan, Warren & Westbrook, 1994. "The Persistence of Local Legal Culture: Twenty Years of Evidence from the Federal Bankruptcy Courts," Harvard Journal of Law & Public Policy, 17:801-865.) From these studies and others, we know that local legal culture plays a significant role in bankruptcy chapter choice.

The persistence of local legal culture makes it difficult to use a snapshot of differences in state bankruptcy filings rates or the percentage of chapter 13 cases as a proxy for the financial distress of homeowners. To make such a measure meaningful, one would have to follow the filing rate of particular states across time. In statistics-speak, we need longitudinal (over time) not cross-sectional (across observations) data. Bankruptcy filing data by state are difficult to get and assemble, especially going back in time--why that should be probably should be the subject of another post--making the task beyond what I have time to devote to a blog post. Thus, I'm going to say that we can't say a whole lot about the mortgage foreclosure crisis from the chapter 13 data.

U.S. Bankruptcy Filings Up from One Year Ago But Leveling Off

The monthly filing figures through November 2007 just became available courtesy of Automated Access to Court Electronic Records (AACER). Total U.S. bankruptcy filings in November 2007 were 73,892, but the better way to think about it is that there were an average of 3,695 filings in November per filing day (i.e., days the U.S. courts were open for business). Those figures are significant increases as compared to November 2006 when there were 57,316 total U.S. bankruptcy filings, an average of 2,866 per filing day. The average number of filings per filing day thus was 28.9% higher in November 2007 than it was twelve months before. For the first eleven months of 2007, total U.S. bankruptcy filings were 760,488 or 41.8% higher than the 536,237 bankruptcy filings in the first eleven months of 2006.

With these numbers and only one month left, we can make expect the following for total U.S. bankruptcy filings for the calendar year 2007:

• 826,000 if filings continue through the end of 2007 at the same daily rate they have averaged for all of 2007
• 834,000 if filings continue through the end of 2007 at the same daily rate they were in November 2007
• 837,000 if filings after November 2007 represent the same proportion of filings (about 9.2%) as the filings after November 2006 represented of the total 2006 figures

Some may jump at simple explanations for the increase in filings since 2006, perhaps pointing to trouble in the subprime market or other consumer credit woes. I think there is not enough evidence to jump to those conclusions. The reasons for filing bankruptcy usually are multicausal, and historical study suggests that over the long-term outstanding debt is the primary determinant of the number of bankruptcy filings. Most significantly, bankruptcy filings generally lag their underlying causes. People don't rush out and file bankruptcy the moment financial troubles appear. Rather, evidence suggests that people typically struggle with financial trouble for a year or more before filing bankruptcy. The increase in 2007 bankruptcy filings are most likely attributable simply to bankruptcy filings returning to their "natural" level after the trough that followed the surge in bankruptcy filings just before the 2005 law.

Are Bankruptcy Filings Increasing Less?

A few days ago, I posted on the U.S. bankruptcy filing figures through October 2007 and projected that there will be 820,000 and 846,000 U.S. bankruptcy filings in the 2007 calendar year. In this post, I want to take a more extended look at the long-term trend going forward.

The data suggest that bankruptcy filings are not increasing at as great a rate as they were previously. That is not to say that bankruptcy filings are decreasing or even leveling off. Rather, the rate of increase is declining. This analysis will not necessarily hold true if conditions change, and some will argue that conditions already have changed because of the subprime lending crisis. All we can do, however, is analyze the historical data. Put differently, I have to make the same disclaimer as the rushed voice at the end of any brokerage commercial: past performance is no guarantee of future returns.

With bills pending in Congress to amend the Bankruptcy Code to help homeowners struggling with out of control mortgage debt, some have questioned whether the bankruptcy system could absorb the hundreds of thousands of new bankruptcies that might develop. The analysis here helps provide some information for that debate. Although one would predict that bankruptcies will continue to increase, we should not expect bankruptcies to continue to rise at the rate they have been for the past twenty months. Looking beyond my analysis here, the total number of annual U.S. bankruptcies is a little more than half of what it was before the 2005 law. There seems to plenty of room in the system to absorb more bankruptcies.

Why do I believe bankruptcy filings will continue to rise but not at the same high rate as in the past (again assuming no dramatically changed conditions)? Later in the post, I have a statistical forecast, but we can begin with just a simple look at the data. The first table to the right/above gives the monthly data for total U.S. bankruptcy filings since January 2006. Pushing the monthly data back before that date would give a misleading picture because the October 2005 changes in U.S. bankruptcy law caused a massive surge in filings and then a near total dearth of filings in the few months thereafter. Arguably, the January 2006 and perhaps the February 2006 data still reflect this abnormal statistical blip, but starting in January gives us at least one complete calendar year.

Update: 2007 Bankruptcy Filings Watch

The good folks at AACER have again been kind enough to send along monthly U.S. bankruptcy filing statistics for October. They always tell me not to worry about giving them credit, but their statistics are more timely than what we get from the U.S. courts. They deserve the credit.

This means it's time to update the 2007 bankruptcy watch. October 2007 saw 81,065 total bankruptcy filings as compared to only 67,542 filings for September. That difference is deceiving, however, because there were 22 filing days (i.e., days the U.S. courts were open for business) in October as compared to only 19 in  September. On a daily basis, October had 3,685 filings per day as compared to 3,550 in September, a 3.7% increase. With only two months of filing left, we can expect the following for annual 2007 filings:

• 820,000 if filings continue through the end of 2007 at the same daily rate they have averaged for all of 2007
• 838,000 if filings continue through the end of 2007 at the same daily rate they were in October 2007
• 846,000 if filings after October 2007 represent the same proportion of filings (about 18.9%) as the filings after October 2006 represented of the total 2006 figures

I wanted to get the updated figures posted. Soon, I'll post some comments on the monthly trend we have seen since January 2006.

Reporting on the "Mortgage Meltdown"

Journalists have produced some really excellent stories about the rising foreclosure rate and the struggles of families to save their homes. I've previously blogged about an interesting LA Times piece about the lack of reliable data about foreclosure numbers; another favorite article is the NY Times story, Can These Mortgages Be Saved?, about difficulties that consumers have in obtaining loan modifications from servicers.

In recent days, however, the Wall Street Journal has published pieces about bankruptcy that contain inaccuracies. An editorial on October 24th, The Mortgage Meltdown, grossly mischaracterizes pending bankruptcy legislation. The bill, the Emergency Home Ownership and Mortgage Equity Protection Act of 2007(HR 3609), would reverse the existing preferential treatment in Chapter 13 bankruptcy law for home mortgages and permit debtors to modify their home loans in certain ways. The Wall Street Journal says that the legislation will "allow bankruptcy filers to treat home loans as similar to unsecured credit-card debt." The editorial then sarcastically posits "Guess how eager lenders will be to offer low mortgage rates if they have no better chance of collecting on a mortgage than they do on a credit card?" This characterization isn't mere alarmist hyperbole. It's flatly wrong. Mortgages are liens; they give the lender a security interest in the debtor's real property. Absent unusual circumstances, secured creditors retain their property interestsin the collateral. If they aren't paid--inside or outside of bankruptcy--they can foreclose on the property. In contrast, credit cards are normally unsecured debt. The lenders have no collateral. Unsecured debt and secured debt are treated differently in bankruptcy law, just as they are in state law. The apt comparison for HR 3609's proposal is that home mortgage lenders would be treated just like lenders whose collateral are vacation homes, or commercial property, or rental houses, or whose collateral are cars, motorcycles, or appliances. The Wall Street Journal should print a correction, making clear that the bill would not put mortgage lenders on par with credit card companies, and retracting its suggestion that the legislation would thereby cause mortgages to have the same interest rates as credit cards. Perhaps some would excuse the Journal because these statements were in an editorial. But a recent news article on bankruptcy as a home-saving device was also misleading.

Counting Medical Bankruptcies

About half of the families filing for bankruptcy do so in the aftermath of a medical problem (various calculations range from 46% to 63%.  Since my coauthors and I published a handful of academic papers on this, there has been a lively debate about whom to count among medical bankruptcies.  Those with big medical debts are counted, but measurement can be tricky as debt migrates to credit cards or home equity lines of credit.  Similarly, some people will pay the doctor, then put groceries on the credit card.  Others may have medical debts paid by insurance companies, but several weeks of lost time from work puts them under water.

But none of these ways of counting would cover this family that turned up in our bankruptcy sample.  Here is an excerpt from the telephone interviewer's side notes: