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.

Significantly, the rate of increase in bankruptcy filings seems to be leveling off. I wrote about that phenomenon a few weeks ago, and the November 2007 figures provide more confirmation of this general trend as the average daily filings were virtually the same as they were in October. If the subprime crisis was already driving up bankruptcy filings, we would have expected bankruptcy filings to increase at a greater rate the past few months, but the opposite has happened. I am not saying the subprime crisis will or will not lead to an increase in filings in the future. It's just that there is no evidence that it has happened yet.

With another month of data, I revised my forecast for bankruptcy filings next year. The numbers now suggest that 2008 calendar year bankruptcy filings might be 1.06 million with a 95% statistical confidence interval of between 0.85 million and 1.26 million filings. Again, the forecasting technique I used was based on an analysis of the past two years of data and hence is valid only to the extent conditions remain roughly the same for the next year. The subprime crisis, of course, is one condition that has changed. More importantly, the Fed  has reported very small growth rates in the amount of outstanding consumer credit. My Paradox of Consumer Credit paper finds that short-term changes in bankruptcy filing rates move in the opposite direction of consumer credit. In the long term, bankruptcy filing rates move with consumer credit. The intuition is that the unavailability of credit makes it more difficult for people to borrow to stave off the day of reckoning, but those who are able to use extra borrowing to stave off financial disaster do eventually file bankruptcy. If consumer credit continues to be tight and consumers borrow less, that could drive up bankruptcy filing rates over the next year beyond my forecasted levels but lead to lower filing rates in 2009 and 2010.