Bankruptcy and the Crisis: Why so Few?

Many thanks to Bob for the invitation to guest blog here.  Those who follow Bob's postings on bankruptcy filing numbers will have seen that U.S. consumer bankruptcy filings have been plodding upwards steadily, but only to roughly where they were before the BAPCPA bubble back in 2005.  One of the inscrutable mysteries of the financial crisis of 2007-??, which is after all a housing and consumer debt crisis, has been how few bankruptcies have been filed.  Somehow, historically unprecedented levels of consumer debt and loan defaults have not produced the surge in bankruptcy filings one would expect.

July Bankruptcy Filings Rise, But Look at the Big Picture

The folks at Automated Access to Court Electronic Records (AACER) sent over the July bankruptcy figures. Total U.S. bankruptcy filings in July (134,600) were about the same as they were in June (133,900). There was extra business day in July, however, meaning that the daily filing rate, rose 5.3% to 6,408. The year-over-year increase in the daily filing rate was 7.7%.

Regular readers know that I am skeptical of reading very much into the ups and downs of the monthly filing rate. If you had looked at the June fiing rate, you would have seen an 8.9% drop in daily bankruptcy filings and perhaps concluded the economy was beginning to turn around. The July increase might lead you to the opposite conclusion. The most informative analysis comes from taking a longer term look at the data. And, there is my usual caveat that bankruptcy filings are, at best, a weak and trailing indicator of overall economic strength.

Visualizing Financial Distress

The Admistrative Office of the US Courts (AO) has released updated data on bankruptcy filings. While the AO data as some problems, as Bob Lawless has pointed out, I am pleased that they seem to have improved the accessibility of the data. For example, there is now an interactive map by state that is sort of fun (well, fun in my world).

One nice thing is the statistics on net scheduled debt. Given the way that some people seize on the dollars of debt in bankruptcy as a marker of the system, I like how the AO has deducted nondischargeable debt from the total debt listed by the debtor. To do otherwise, gives a misleading picture of how much "help" people get from bankruptcy. But additional caution is still needed. For the chapter 13 filers, about 2 in 3 of these people will not get a discharge of any unsecured debts because they will not complete the repayment plan. Much more importantly, these figures are total debt, the bulk of which will be mortgage and auto debt, which debtors must pay if they want to keep their homes and cars.

All in all, a better use of your time might be the interactive maps at the NY Fed. These have been upgraded recently to show delinquencies on auto loans, bank cards, mortgages, and even student loans. Check them out here.

Hat tip to former Credit Slips guest blogger, John Rao, for bringing the AO data to my attention.

June Sees Big Drop in Bankruptcy Filing Rate

The U.S. daily bankruptcy filing rate dropped in June by 8.9%, the second-largest monthly drop since 2006. Although bankrupt debtors filed approximately the same number of cases in June as May (about 133,000 - 134,000), there were two more business days in June meaning the daily filing rate actually declined. On a year-over-year basis, June 2010 was a 6.6% increase from June 2009, but this is the lowest year-over-year increase since the wave of cases from the 2005 changes to the bankruptcy law worked their way through the system.

These latest data provide the strongest evidence yet that the U.S. bankruptcy filing rate may be leveling off after nearly five straight years of steady increases. As always, many thanks to Automated Access to Court Electronic Records (AACER) for providing the latest statistics.

U.S. Bankruptcy Filings at Same Level as Before 2005 Law

According to Automated Access to Court Electronic Records (AACER), the U.S. daily bankruptcy filing rate for May was 6,672, which was virtually identical to the rate from April. On a year-over-year basis, the May filing rate increase was only 10.5%. As regular Credit Slips readers know, the year-over-year increase has been declining for some time. A year-over-year increase of 10.5% is small compared to recent history. For example, in May 2009 there was a 41.4% year-over-year increase in the daily bankruptcy filing rate.

For the past five years, the story of the bankruptcy filing rate has been a steady increase, but that story might be changing. Even after adjusting for changes in population (see the graph to the right). U.S. Bankruptcy filings are at the level they were before the 2005 changes to the bankruptcy law, suggesting they might be nearing their "natural" rate. Of course, there is no true "natural" rate of bankruptcy filings, but what I mean by that is that the bankruptcy filing rate may be nearing its limit given the amount of consumer debt that exists. Unless there more consumer debt is injected into the system, bankruptcy filings will have to stop rising. And, consumer debt actually has been steady to falling. None of this is to be sanguine about the number of bankruptcy filings, we are on target to get around 1.65 million bankruptcy filings in 2010.

U.S. Trustee Audits on Debtor Bankruptcy Filings

In March, the Executive Office of the U.S. Trustee (EOUST) released its annual report on audits of individual chapter 7 and chapter 13 cases. The audits identified a "material misstatement" in 22% of the cases examined for fiscal year (FY) 2009. The 2005 changes to the bankruptcy law require these audits and the EOUST annual report. The "material misstatement" rate for FY 2009 is similar to previous reports--21% in FY 2008 and 30% in FY 2007. The rate of "material misstatements" suggested both a public policy issue and a research methodology issue.

The Uneven Rise and Fall of Bankruptcy Filings

Using data from Automated Access to Court Electronic Records (AACER), I recently posted about the 4.2% drop in total bankruptcy filings for the month of April, which came on the heels of a 35% increase in the month of March. These are national figures and mask considerable variations across the country. To look at variation across the country, I compared the total daily bankruptcy filing rate for the first four months of 2010 to the daily filing rate for all of 2009. Also, I used the federal judicial districts as the unit of measurement. Although federal judicial districts are not an ideal geographic breakdown, they do allow for a little bit more nuanced picture than using state-level data and avoid what can be an overwhelming morass of county-level data (which are not readily available anyway)

There are some areas of the country that are experiencing declining or flat bankruptcy filing rates. Of the 91 federal judicial districts (not counting Puerto Rico, Guam, and the Virgin Islands), 22 have experienced a decline or no increase in the bankruptcy filing rate. As the map to the right shows (click on it for a bigger image), the areas with declines (blue) are mainly in the southeast. Nevada stands out as an exception, although that district experienced such huge increases last year, its decline for the first four months may just be a regression to the mean.

The rate of increase across the entire nation was 10%. There are 29 judicial districts that saw a rate of increase greater than 10%. Those judicial districts fall principally in three areas: the plains and west coast, the upper Midwest, and the northeast. Thus, the national statistics do mask a great deal of regional variation. I'll stop there -- my flight is about to get called.

Bankruptcy Filings Drop in April

The daily bankruptcy filing rate in April was 6,631, which was a 4.2% decline from March. The April filing rate was 13.2% higher on a year-over-year basis, but that is the lowest year-over-year increase since the trough after the 2005 changes to the bankruptcy law. As always, a thank you goes to Automated Access to Court Electronic Records (AACER) for supplying the data.

Before we get carried away with what looks like really good news, it is important to keep a few points in perspective. First, April has tended to see declines in the bankruptcy filing rate (see the table to the right). It's all part of the annual cycle of bankruptcy filings. Because February and (especially) March tend to have inflated filing rates as people use their tax refunds to pay for bankruptcy court costs and attorneys fees, April tends to see a decline as the filing rate moves back toward its mean. Second, the monthly bankruptcy filing rates do what a lot of data series do--that is, they move up and down. It's probably not profitable to draw conclusions from one month's worth of bankruptcy data. Indeed, it has only been a few years since information technology made reporting of monthly bankruptcy filing figures easy to do. Before then, we generally only looked at quarterly data. Third, as I'll explore later, there is a great deal of regional variation. Some parts of the country, especially in the west, are still seeing increasing filing rates.

The Congressional Research Service Says No Real Effect from BAPCPA

According to a story in this morning's BNA Bankruptcy Law Reporter, the Congressional Research Service (CRS) released a study stating the 2005 amendments to the bankruptcy law (the Bankruptcy Abuse Prevention and Consumer Protection Act or BAPCPA) will not permanently reduce the U.S. bankruptcy filing rate. Those findings fit with what we have been seeing the past few months. Even on a per capita basis, the March 2010 bankruptcy filing rate matched the rate from before the 2005 amendments.

CRS reports are not publicly released as a matter of course, and the Bankruptcy Law Reporter is a subscription service. Hence, I can't link you anywhere for this information. If someone does have a copy of the CRS report, I will be happy to make it available here through Credit Slips and/or pass it along to Open CRS.

March Bankruptcy Filings Are Up But Not "Spiking"

Media outlets are reporting that bankruptcy filings climbed sharply in March (see, for example, Duff Wilson's report in the New York Times or the Reuters wire story). Those reports are not wrong, but they don't tell the whole story. As always, many thanks to the ever efficient Automated Access to Court Electronic Records (AACER) for providing the data.

It is true that there were over 158,000 bankruptcy filings in March 2010, and it is also true that this figure represents a 35% increase over February. Long-time Credit Slips readers know the golden rule for monthly bankruptcy filing data: Thou Shall Adjust for the Number of Business Days in the Month. The total monthly bankruptcy filing figures are very sensitive to the number of business days in a month. In fact, since 2007, the number of business days alone explains about 30% of the variance in the month-to-month differences.

There were 23 business days in March as compared to only 19 in February. Once one adjusts for the number of business days, the March filing figures show a much less dramatic increase and an increase that is very much in keeping with both historical cycles and recent trends. March had a daily bankruptcy filing rate just under 6,890, which is a 11.6% increase from the February daily bankruptcy filing rate of 6,170. To put some perspective on the 11.6% increase, consider that February was a 14.2% increase over January. These increases are consistent with the historical cycle of filing rate increases early in the year. If the cycle holds again this year--and there is no reason it shouldn't--the rest of the year should have a relatively constant filing rate until late fall.

Today's Consumers Prefer Chapter 7 Bankruptcy 3 to 1

While the media focuses on the total number of filings, a drill down into those data can also tell us something about the pain that families are suffering. In the last two years, since the foreclosure crisis, the fraction of all consumer filings that are chapter 13 cases has plummeted. In the language of taste tests of soda pop, today's consumers prefer chapter 7 three-to-one over the competition (aka chapter 13). Check out these data from the UST Program. In 06-07, chapter 13s averaged about 38% of all filings. In 08, there was a steep drop to 31%; and in 09, a further drop to 26.5%. These are really big changes in such a large system.

 

The obvious explanation for this fall in chapter 13 is a decline in people trying to save their homes, which we think is a major reason that people chose chapter 13 instead of chapter 7. 

Homeowners in 2008 and 2009 seem to have realized three things: 1) home prices are not going up anytime soon; the "crisis" is  a long-term change in the housing and mortgage markets; 2) they are not going to get a loan modification; the Administration's projected numbers of those who would be helped by HAMP and HARP were fanciful (dare I say "misleading"?); and 3) they simply cannot make their mortgage payments in a world where overtime is being eliminated, unemployment is a fear or reality, increased tax burdens loom as states and localities can't make ends meet, and many other costs remain high (gas, health care, etc.) Many people had these realizations in 2008, and many more had them in 2009. Each year, the share of chapter 13 filings plummeted. And all this, despite BAPCPA's purported intent of driving up chapter 13 filings and making people pay more of their debts.

Homeowners' pessism may not be a bad thing. In a research paper that I authored with John Eggum and Tara Twomey, we found that chapter 13 filers in April 2006 (before the foreclosure crisis) had very high homeownership costs, with more than 70% of homeowners trying to save homes that subsumed more than 30% of their incomes (the long-standing standard for affordable housing). The lower fraction of chapter 13 filings may ultimately translate to a higher rate of plan completion for chapter 13; if consumers are reticient to try to save homes with high costs, maybe more than 1 in 3 chapter 13 plans will make it to completion and a higher fraction of chapter 13 debtors will earn a discharge. Time--a long time, given the five year repayment plans that dominate chapter 13--will tell if the lower proportion of chapter 13 cases as a share of total bankruptcies will correlate with a higher discharge rate for chapter 13.

Half-Empty or Half-Full: The February Bankruptcy Figures

Pick which blog post you want to read:

The year-over-year increase in bankruptcy filings for February hit its lowest mark since the trough in filings after the 2005 changes to the bankruptcy. February saw only 6,170 filings per business day which was a 13.3% increase over February 2009. The rate of increase in bankruptcies is leveling off, possibly indicating a brightening financial picture for the middle class. The February figures continue a trend that has been developing over the past several months, as discussed in the blog post discussing the January figures and its accompanying graph.

Or, if you would prefer:

The daily bankruptcy filings in February (6,170) hit its second-highest point since the 2005 changes to the bankruptcy law. February daily bankruptcy filing rate was a 14.2% increase over January. If the trend continues, 2010 will be a record year for bankruptcy filings, possibly even eclipsing the aberrational year of 2005 when people filed in a rush to beat changes to the bankruptcy law. These figures show a deteriorating financial picture for the middle class.

The figures in both paragraphs are accurate. It's all in how you pitch it, and if you read the blog regularly, you will remember me bemoaning the often hyped-up presentation of the bankruptcy figures just to create sensational headlines. To get a balanced sense of what the bankruptcy filing figures are telling us, there are a few key points always to keep in mind.

Chapter 11 Filing Data Are Noisy

On the heels of Monday's post about the January bankruptcy filing rate, I intended to write something insightful about chapter 11 filings in different places around the United States. After playing with the data, there are at least three problems with such a post. First, it is Thursday already--egad--putting us well past the heels, ankles, or even thighs. Second, "insightful" is a high ambition; "mildly interesting" would be better. Third, chapter 11 data are noisy, making it difficult to impossible to say anything about filing rate trends.

The last point might be of interest to those of us who like to look at filing rate trends, and I thought I would give it some elaboration. The graph shows the monthly number of chapter 11 filings by legal entities (such as corporations, partnerships, and LLCs) in four different federal judicial districts. Note that the scales are different in each graph. The filing rates are from the Bankruptcy Data Project at Harvard (BDP), using data supplied by AACER. My original thought was to look at the chapter 11 filing trends in different locales, perhaps comparing these trends to local economic conditions or consumer bankruptcy filing rates. That's just not going to work, at least not without some further data manipulation.

The problem is that the chapter 11 filing figures show tremendous volatility as shown by the spikes in the chart. All of the four districts--and I picked these because they are higher population districts--have sudden and abnormal surges in chapter 11 filings. For example, in August 2008 legal entities filed 215 chapter 11 petitions in the Central District of California (CACB) as compared to only 48 in July and 31 in September. In fact, in no other month during 2008 were there more than 67 legal entity chapter 11 petitions in this judicial district. This volatility would not be a problem if it was capturing some underlying phenomenon, but it's not.

Bankruptcies Maintain Similar Month-to-Month Rate in January

The January bankruptcy filing basically held steady to December, according to the new bankruptcy statistics now available from Automated Access to Court Electronic Records (AACER). There were just over 102,000 total bankruptcies spread over the nineteen business days in January. That is a daily filing rate of 5,386, a rise of only 1.3% from December's daily filing rate of 5,319. For monthly bankruptcy filing rates, a 1.3% increase probably does not rise above the threshold of statistical noise.

The January 2010 rate is a 20.6% year-over-year increase from January 2009. That may sound like a hugely impressive annual increase, but regular Credit Slips readers will know better. To keep the 20.6% year-over-year increase in perspective, consider that January 2009 had a 31.6% year-over-year increase compared to January 2008 which in turn was a 21.3% increase as compared to January 2007. It's not that double-digit increases in the bankruptcy filing rate are something to be sanguine about. Rather, the rate of increase in the rate of increase appears to be slowing. As the graph shows (click for a larger view), the year-over-year increase started slowing in August of last year. I attribute this slow down to the filing rate just catching up with its "natural" level after the trough following the 2005 changes to the bankruptcy law rather than any fundamental changes in the economic situation.

With one month of data, it is way too early to be making too many projections about annual U.S. filings. When I ran the numbers for January 2010, however, I noticed that the month of January constituted 6.4% of the bankruptcy filings in 2008 and 6.2% of the bankruptcy filings in 2009. Do two years of relatively consistent January numbers make for a trend? If so, then the January 2010 data suggest total annual bankruptcy filings will be 1.60 to 1.65 million. That would be just below my estimate of 1.70 million (or slightly more) filings for 2010.

Anna Nicole Smith --The Bankruptcy That Keeps on Giving

It can really bug me when blogs have posts that are just a naked attempt to draw traffic to their site. These posts always are sure to contain a few words that will attract the attention of search engine users seeking porn or the usual titillating web sites. Seemingly random references to celebrities such as Brittany Spears, Rihanna, or Paris Hilton will be put into the blog. And, worse of all, these naked attempts at self-promotion will use word repetition and appear near the beginning of the web page to optimize their search engine placement. Therefore, I was not surprised to find references to the 15-year old bankruptcy case of the late Anna Nicole Smith, who was often described as sexy and buxom.

On a more serious note, it was somewhat puzzling to see references to this old bankruptcy case. It was dredged up for an AP story that was sourced to "newly released government files" obtained by a Freedom of Information Act (FOIA) request directed to the Department of Justice. The article cites to "the bankruptcy examiner's report." I don't give a rat's pa-too-tee about the contents of the report, but I wondered about the whole FOIA thing. If this was a bankruptcy examiner's report, wouldn't it be part of the public court record? Why did they need to use FOIA? If the court ordered the report filed under seal or otherwise made the report unavailable, then why can a FOIA request effectively circumvent the court order? Or, was this not a bankruptcy examiner's report in the technical sense of the term and, if so, what was it?

How Many Bankruptcy Appeals?

Classes started today. This semester I am teaching Business Bankruptcy, which principally covers chapter 11. We were talking about the bankruptcy court system, a topic that does not always get covered in great detail in the other bankruptcy courses, and the appellate steps in the bankruptcy system. A student asked how many U.S. Court of Appeals cases each year involve bankruptcy.

That was a good question, so I looked it up. What's your guess for the number of U.S. Court of Appeals cases, as reported by the U.S. judiciary, that involve bankruptcy each year? Answer after the jump.

Big Drop in December 2009 Filings--That's RIght, a Big Drop

On a daily basis, December bankruptcy filings fell to 5,304. That is a 12.8% decline from November. According to Automated Access to Court Electronic Records (AACER), there were over 116,600 filings spread over the 22 business days in December. The December figures do represent a 16.2% year-over-year increase, but that is the smallest year-over-year increase since the 2005 changes to the bankruptcy law worked their way through the system. Also, the end of the year tends to see drops in the daily filing rate, as we have seen this year, and the 2009 drops are higher than in previous years. The December 2008 drop was 10.8%

The bottom line is that bankruptcy filings continue their long-term rise, but the rate of increase is slowing. The December 2009 figures are right in line with my estimated increase of 17% for all of 2010 (which would bring us to around 1.7 million total filings annually). This is hardly great news but also hardly awful news considering that the past three years have seen annual increases of around 30%. I've updated the filing trend graph in an attempt to show the long-term trend.

The Wall Street Journal reported "Personal Bankruptcy Filings Rising Fast," a sentiment echoed in many other media reports about the December 2009 bankruptcy figures. Why the discrepancy between these dramatic reports and my more measured report? First, I don't have to sell advertising space or subscriptions. Second, the total December filing figures are actually above the November figures (116,600 as compared to 115,500), but there were three more business days in December. These media reports are relying on figures from the National Bankruptcy Research Center and passed along from the American Bankruptcy Institute, neither of which adjusts for the number of days in a month. Moreover, these reports emphasize the year-over-year increases without placing them in a larger context.

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.

November Bankruptcy Filings Decline, Following Seasonal Pattern

According to data from Automated Access to Court Electronic Records ("AACER"), there were about 115,500 total bankruptcy filings in November 2009. This is a drop from October but, contrary to a few reports, not a big drop in filings from October. The raw numbers declined quite a bit--133,300 to 115,500--but November had nineteen business days as compared to twenty-one business days in October. On a daily basis, the November filing rate was 6,079, which is a 4.3% drop from October. The Calculated Risk blog did it exactly right by putting a disclaimer right at the top of its post reporting the raw numbers from a different data source: "The monthly data is noisy and is not adjusted for days in the month."

Moreover, the November drop is keeping with seasonal patterns as shown by the graphs in one of my previous blog posts. The end of the year typically sees a decline in bankruptcy filings. This year's November drop of 4.3% is higher than previous years. Indeed, in 2007 and 2008, November was not a month that saw any drop. The November filing rate has to be coupled with December. To see where bankruptcy filing rates might be headed in the long-term, December 2009 will be an important indicator as well as January - March of 2010, months that normally see big increases.

October Bankruptcy Filings Set New Post-2005 Record

The daily bankruptcy filing rate in October hit 6,200, setting a new record since the 2005 changes to the U.S. bankruptcy law. There were about 130,200 total filings spread over the 21 business days in October. The October filing rate is a 3.7% increase from September and a year-over-year increase of 25.3%. As always, these data are courtesy of Automated Access to Court Electronic Records (AACER) There are two ways to receive this news, both of which have some validity.

First is the "glass is all the way empty" approach, that the rise in the bankruptcy rate reflects the poor health of the economy, results from rising unemployment, and is a sign that the U.S. consumer is not as healthy as recent figures showing GDP growth might suggest. Although I continue to think that the primary short-term driver of ups and downs in the filing rate is the availability of consumer credit, there is no way to look at record bankruptcy filing rates and not see problems for the U.S. consumer.

It also right to look at these data as saying the "glass is only half empty." This is not the same as saying the most recent data should be interpreted optimistically, that is the glass is half full. Rather, it is a subtle and complex story trying to draw a distinction between "dire" and "not good."

The graph to the right shows the month-to-month change for the past three years. (I have omitted 2006 because, and especially for the early months that year, its bankruptcy filing trends were greatly affected by the 2005 changes to the bankruptcy law.). The graph shows seasonality in the bankruptcy filing data -- sharp rises early in the year and a decline toward the end of the year. Part of the seasonality has been an increase in the fall of each year, and the October 2009 figures fit that pattern.

Means Test Changes Won't Mean Much

Controversy abounds these days about whether government programs should adjust downward to reflect cost-of-living and income declines. I’d like to stir up a little controversy here at Credit Slips about Bob Lawless’ recent post that said the drop in median state income will "make it harder to file bankruptcy." First, I don’t quite follow the logic of the concern. Even if the income cut-off drops, "median" still means that half of all people are below the number. I would expect those considering bankruptcy to occupy the same places in the distribution of incomes in their state, regardless of median income fluctuations. So, it seems to me then that the fraction of potential bankruptcy debtors with above-median income would remain constant, even if the median income drops. The legal standard isn't changing, so I don't think it is fair to call the change in median income a "tightening" of the bankruptcy law. Second, even if bankruptcy filers don’t experience the general decline in income of the state’s entire population, the effect of a change in median income on bankruptcy eligibility is likely to be very, very small. Bob admits the change won't affect "a lot" of people but also says it won't be "a few." I think it really will be just a few. Why? Because the fraction of those made ineligible because of the means test is really tiny, and so even over an anticipated 1.5 million bankruptcy cases in 2009, we are looking at a minute change when we talk about adjusting the operation of the means test. In 2008, only 10% of chapter 7 debtors had above-median incomes. And nearly all of that 10% passed the means test once expenses are deducted. According to its report, the U.S. Trustee filed a motion to dismiss for abuse in 2,881 Chapter 7 cases--that works out to 4% of all above-median cases and .4% of all chapter 7 cases. Those numbers are hard to square with any fear that there will be any measurable change in the fraction of people made ineligible for chapter 7 this year. Importantly, these numbers don’t reflect how the very existence of a median income test may discourage people from filing a bankruptcy case or may push people directly to chapter 13 rather than risking an abuse determination. But again, that effect—whatever its magnitude—probably won’t change with median income fluctuation.

Things That Have Piled Up

Long time readers of Credit Slips may have noticed that my blogging has flagged the past few months. That is because my colleagues, Jennifer Robbennolt and Tom Ulen, and I have been working on a text entitled Empirical Methods in Law. It is intended to be a user-friendly guide to the topic, useful (we hope) as both a deskbook and a textbook. It should be out later this year, and I'll try to say more about it.

In the early part of this past week, I was at the annual meeting for the National Conference of Bankruptcy Judges (NCBJ). It was in Las Vegas, which is always fun, but for me I got to meet up with many of my former colleagues at UNLV. The NCBJ meeting is always great. The panels are a good mixture of day-to-day practicalities and the big picture. Plus, you often get to hear what is on the judges' minds. There were about 1800 attendees this year--so I understand--if you're a bankruptcy lawyer it's worth going if you never had a chance. Next year, it's in New Orleans.

Between our book and my trip--oh, and I had to do a faculty workshop on Thursday--a few things piled up.

How Many Bankruptcy Filings Were There in September?

In a post yesterday, I used bankruptcy filing figures from Automated Access to Court Electronic Records (AACER) that showed just over 125,500 total filings in the month of September. A large number of news stories reported there were 124,790 consumer filings in September (e.g., here, here, and here). In turn, these stories were sourced to the American Bankruptcy Institute (ABI), which in turn attributed its data to the National Bankruptcy Research Center. This is too small a difference (about 0.5%) to be explained by a discrepancy between consumer versus total filings.

Both of these figures cannot be right. I have posted about how I have beaten on the AACER data and found them accurate. Also, I wrote to AACER, and they verified their September 2009 number. For these reasons, I believe the AACER report on September bankruptcy filings is accurate. I wonder whether the ABI release did not confuse total filings and consumer filings. It's not that I feel the need to call out a mistake by the media or the ABI on the September figures. Goodness knows that I make a lot of mistakes, and I may be mistaken here. Rather, my attempt to reconcile the two figures reminded me again that the line between consumer and business cases is so thin that it often is not profitable to make the distinction.

Bankruptcy Filings Maintain a Steady State

The good folks at Automated Access to Court Electronic Records (AACER) report there were over 125,500 total bankruptcy filings in September. The daily bankruptcy filing rate was 5,980 for an increase from August of only 0.5%.

Recent media reports and blog posts like to comment on how monthly bankruptcy filings have surged, soared, and skyrocketed. The reality is not as dramatic. The bankruptcy filing rate remains pretty much where it was in March when it was 6,000 filings per day. In fact, from March to September the daily bankruptcy filing rate has been 6,000 filings per day. (Those are not rounded-off figures.) From month-to-month the rate has moved up and down a few percentage points, but that is what monthly rates do.

The dramatic comparisons (and news stories and blog posts) come from year-over-year increases. September 2009 did show a 31% year-over-year increase as compared to September 2008. Guess what? That is the lowest year-over-year increase since September 2008, which showed a year-over-year increase to September 2007 of 28.9%. In turn, September 2007 had a year-over-year increase of 27.9% as compared to 2006. In fact, the average monthly year-over-year increase since January 2007 has been 37.6%. If you want a big headline, all you have to do is report the year-over-year increase. By that measure, however, September 2009 had a lower-than-average year-over-year increase.

August Filings Hold Steady

It is September 8, and I never did my monthly post about the latest U.S. bankruptcy filing figures. Hopefully, late is better than never. According to data from Automated Access to Court Electronic Records (AACER), there were slightly more than 124,000 bankruptcy filings in August. Spread over the twenty-one business days in August, there were 5,914 filings per day. That represents a negligible 0.6 decline from the July rate of 5,948 filings per day.

Another Sign of the Futility of the 2005 Bankruptcy Law

A big feature of the 2005 changes to the U.S. bankruptcy law was supposed to be a means test that would get people into chapter 13 instead of chapter 7. Because a chapter 13 requires a 3- or 5-year repayment plan, the law's advocates pitched it as an attempt to force "can pay" debtors to repay a portion of their debts. Initially, chapter 13 rates did go up, but that was a statistical artifact of the huge surge in filings just before the 2005 law. As I have noted previously, the chapter 13 rate has been declining ever since.

I am now officially going to call it ....

Anyway you measure it, chapter 13s have returned to their historical level. In fact, one could even interpret the data to show that chapter 13s are slightly below their historical norms. As a percentage of all filings, the chapter 13 rate for July 2009 was 28.1%, and the chapter 13 rate for the first seven months of 2009 was even less--27.6%. In 2004, chapter 13s were 28.1% (the red line in the graph) and from 1999 - 004 they were 29.0%. The 2005 bankruptcy law accomplished nothing about chapter choice.

This is just another sign of the futility of the 2005 bankruptcy law. As I've said on numerous occasions, it did nothing to change the underlying economic reality for consumers in deep financial distress. It's not a surprise that the supposedly central goal of the law--more chapter 13s--has not come to pass. Of course, the unstated goal of the 2005 bankruptcy law was to raise the cost of filing and lower the benefit of doing so that consumers would wait longer to file bankruptcy while paying huge default interest rates and penalty fees. In a paper that my colleagues and I published out of the Consumer Bankruptcy Project data, we found the effect was exactly that--consumers are waiting longer to file bankruptcy.

Countrywide Sanctioned by Ohio Court Citing Porter & Twomey

As many Credit Slips readers may be aware, Countrywide Home Loans (which is now part of Bank of America) has been the subject of proceedings in several bankruptcy courts because of the shoddy recordkeeping behind their claims in bankruptcy cases. Judge Marilyn Shea-Stonum of the U.S. Bankruptcy Court for the Northern District of Ohio recently sanctioned Countrywide for its conduct in these cases. Having previously found Countrywide to have committed sanctionable conduct, the question for Judge Shea-Stonum was the appropriate penalty.

The resulting opinion makes extensive reference to Credit Slips regular blogger Katie Porter and guest blogger Tara Twomey's excellent Mortgage Study that documented the extent to which bankruptcy claims by mortgage servicers were often erroneous and not supported by evidence. Specifically, the court adopted Porter's recommendation from a Texas Law Review article that mortgage servicers should disclose the amounts they are owed based on a standard form. Judge Shea-Stonum found that such a requirement would prevent future misconduct by Countrywide. All of Countrywide's claims now or hereafter pending in this court have to be supported by the form attached to the end of the opinion.

If you look at the form and wonder "Weren't mortgage servicers disclosing this information anyway?" The answer is that they often were not. Hence the need for such a form. Although the issue before the court was only what do to with Countrywide, we should move toward this sort of form as a requirement nationally for all mortgage servicers. (Hat-tip to Professor Marianne Culhane for pointing me toward this opinion.)

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

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.

Congressional Hearing on Medical Bankruptcies (July 28, 2009)

Last week I joined the Credit Slips custom of presenting testimony to Congress on bankruptcy matters. (My written testimony has apparently been posted here.) This outing was before the House Judiciary Committee's Subcommittee on Administrative and Commercial Law. The hearing was Tuesday, July 28, and was on the subject whether the U.S. healthcare system is bankrupting Americans. (If anyone is more computer-savvy they can post a link; I couldn't find one readily.)

The hearing centered on the CBP study on medical bankruptcies (presented by Dr. Steffie Woolhandler), and had an American Enterprise Institute critic sent to perform a targeted (and at a couple times downright snarky) methodological attack. The tireless Elizabeth Edwards was there too, making her well reasoned and impassioned arguments to the subcommittee and to the racous audience (which included, among others, Dr. Patch Adams). My own testimony reported some findings on rising elder Americans filing for medical bankruptcy but also explained how to distnguish good from bad studies trying to measure medical bankruptcies -- for example, cautioning skepticism with any study that purports to distinguish medical "vs." credit card debt(!). At one point, the hearing got really nerdy and we got into a tiff over the relevance of linear regressions as either necessary or sufficient for causal inference.  (Best line: "I teach linear regressions!") Anyway, it was the usual legislative theater, but I also think some points hit home.

Mortgage Servicing Update

Complaints about mortgage servicers are piling up almost as fast as foreclosures. Yesterday CNN reported that the GAO has concluded that the Obama Administration's HAMP and HARP programs to do loan modifications are off to a very, very slow start. The programs were announced in February, and to date we have 180,000 people in three-month trial modifications. That's a far cry from the 3-4 million people the Administration believed would be helped. Consumer advocates say that servicers remain unresponsive to requests for loan modifications, citing the same stories of incompetent or inadequate personnel, lack of follow-up, and refusal to modify unless a homeowner is in default.

At the same time, judicial criticism of mortgage servicing is picking up steam. A good example is Bankruptcy Judge Diane Weiss Sigmund's opinion, In re Taylor, released in April. The thoughtful opinion sheds light on the underbelly of mortgage servicing. She details the relationship between local and national counsel, Lender Processing Services (formerly d/b/a Fidelity National), and the mortgage servicer. Among other things, she finds that the attorney signing the proof of claim, a legal document filed with the court, reviewed a "sample" of 10% of the claims that his own signature was affixed to. In Taylor the proof of claim had the entirely wrong person's note attached to it (I wonder about a privacy violation here as bankruptcy documents are public), and an incorrect payment amount.

On a monthly basis, Tara Twomey and I post an updated version of our Mortgage Servicing Resources document to our Mortgage Study website, which also contains our papers on the subject. We are grateful to colleagues from around the country who forward us interesting cases that we collect in this document, but we wish studying mortgage servicing wasn't such a growth industry. We hope the Obama Administration can find a way to shape up mortgage servicers in time to help Americans keep their homes.

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.