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.

Comments

[John Pottow]

Bob, won't the mortgage mess also fuel this? That is, I thought that lots of ARMs, etc. have yet to reset so there's still a huge gathering storm so to speak....

[Bob Lawless]

John, I think what you say is the conventional wisdom -- ARMs + resets + general foreclosure mess = more bankruptcies. There probably is some truth in that, and we will see more consumer bankruptcy filings because of the foreclosure crisis. Historically, however, the most influential short-term driver of bankruptcy filing rates is tightening consumer credit. I think the relative unavailability of credit will be a bigger determinant in rising filing rates.

[Brian]

Did the AACER indicate how many of these petitions were filed by women? Or did it just supply a number of total filings?

[Bob Lawless]

There is no demographic information required as part of the basic information that gets filed for a bankruptcy case. Hence, neither AACER or the Administrative Office of U.S. Courts is able to answer simple questions such as what percentage of bankruptcy petitions were filed by women or to break down filings by important demographic categories such as age, race, or marital status.There is no demographic information required as part of the basic information that gets filed for a bankruptcy case. Hence, neither AACER or the Administrative Office of U.S. Courts is able to answer simple questions such as what percentage of bankruptcy petitions were filed by women or to break down filings by important demographic categories such as age, race, or marital status.

[Alan White]

The coming year will reveal a great deal about the long-term impact of BAPCPA on consumer filings. From what practitioners and judges tell me, there may be two factors preventing a return to the 1.5 million annual fiing rates of past years. First, repeat filings by the same debtors have been curtailed. The 1.5 million filings in 2002-2004 included many multiple filings by the same individuals, esp. of Chapter 13s. Second, there has been a huge increase in the fees charged by consumer BK attorneys, often doubling from roughly $1500 to $3000 for 13 filings. Although many consumer BK attorneys left the practice in 2005, the ones who remain are more than willing to take up the slack. 2008 will see not only millions of consumers facing foreclosure, but from all accounts rapid increases in consumer defaults on credit card and other unsecured debt. If we don't see filings returning to something like 1.5 million, I think it is fair to conclude that the barriers erected by BAPCPA, real or psychological, are permanent.

[Bob Lawless]

Alan, I agree there won't be 1.5 million filings, but I think there will be more than 1.0 million filings. I also agree that the 2005 law probably lowered the number of filings. Over 1.0 million bankruptcy filing is a lot considering the increased costs you mention and many of the other hurdles the 2005 law placed in front of consumers seeking effective bankruptcy relief.