On the Immovability of Bankruptcy Filings

Count me in the group that is skeptical about the role of the legal system in influencing overall bankruptcy filing rates. Sure, I can see that the raw filing rates in the United States are a lot higher than they are in other countries. But when you account for factors like level of indebtedness, use of credit cards, and general economic conditions, the apparently large differences between the United States, on the one hand, and the UK and Japan, on the other, seem to disappear. The data suggest that the overwhelming majority of bankruptcy filings are inevitable, and that the principal effect of legal changes is to accelerate or defer the time of filing.

So I have been watching with interest the trends in filing rates since BAPCPA. The conventional view, of course, is that the filings are much lower than they were before BAPCPA and that the mid-2006 plateau in filings suggests that filings have stabilized at a level less than half of the pre-BAPCPA level.

But I’m not convinced. It is true, of course, that the filings for 2006 are much lower than they were in 2004 and 2005. Currently they are about 12,000 per week, as compared to 37,000 per week a year ago and 32,000 a week two years ago. It also is true that the 2006 filings seemed to plateau from around the beginning of April to the middle of August, a fact that might suggest stabilization. But neither of those facts tells us ANYTHING about filing trends. During 2004 and 2005, filings per week declined steadily for much of the middle of the year (weeks 10-28), the same period during which filings reached an apparent plateau in 2006. Thus, if we consider annualized filing trends, the mid-year plateau in 2006 in fact might reflect a push back towards the pre-BAPCPA filing level. To illustrate, the figure below shows the 2004 filings (not affected by the passage of BAPCPA), the 2006 filings, and the difference between 2006-2004.  {Apologies for my lack of graphics expertise.}  The trend line superimposed over the difference line suggests that in the first eight months of this year the relative increase in filings has eliminated about one third of the difference between pre-BACPCPA and post-BAPCPA filing levels.

For me, the hot issue in the consumer credit literature right now is learning what motivates individuals to file at the TIMES that they file. So the passage of BAPCPA provides a natural experiment to see how the statute affects filing dates. There are two obvious filing trends connected with the passage of the statute. First, the “early filing” effect: a LOT of people filed before BAPCPA who otherwise would have filed later. That effect should depress filing rates after BAPCPA until that effect plays out. Second, the “deferral” effect: the provisions that make filing more costly, more bureaucratic, and more humiliating should defer filings until people are deeper in distress. That effect should depress filings initially but ultimately fade away as well.

What is most provocative about the data is the long period over which those effects have played out. I would not have expected pre-BAPCPA early filers to have filed a full ten months early. But if we discard that explanation, we have to think that the deferral effect operates over a similarly extended period, so that the steady upward trend in filing rates reflects the period during which  the deferred filings are slowly rising to their “normal” level. If we have not yet reached that level, BAPCPA is deferring some filings more than ten months.

Comments

[PSP]

"I would not have expected pre-BAPCPA early filers to have filed a full ten months early."

The marketing efforts of bankruptcy lawyers may partly explain that effect. My firm and many others sent out letters to everyone who had consulted us each time one of the branches of congress passed BARF and when Bush signed it. There were also many news reports, which had a noticable effect on people coming in to see us.

[Richard Scholes]

Anecdotal comments from my newer clients indicates the deferral effect from PERCEIVED changes in the bankruptcy law has not run its course. Some think they cannot file bankruptcy at all. The most deceived among them call apologetically after reading my yellow pages ad because they think they are responding to an out of date ad and will be told to go away.

Generally, prospective clients' "knowledge" of bankruptcy law consists of what they have infrequently learned from the media, equally infrequently learned from acquantences, or, most prevalently, beeen told by debt collectors trying to scare them into today wiring money they otherwise would use to feed their kids.

Another indicator, perhaps of desperation, perhaps just that computer use is increasing, is the growing number of internet based payday loans I am encountering. They are illegal here in Vermont but that doesn't stop these lenders, which NACBA listserv posts indicate are often owned by the large credit card banks, from charging 400% interest.

Rick Scholes

[Jim]

Will the fact BAPCPA makes repeat filings more difficult decrease the number of filings? Some percentage of repetitive filers must now be cut out, so I'd think that would decrease the number of filings.