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The December Effect

posted by Bob Lawless

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.

In 2004, 2006, and 2007 (with December 2005 being anomalous because of the 2005 changes to the bankruptcy law), the December filing rate fell. The succeeding January filing rate shows a slight decline or slight increase. In February, the filing rate takes off again.

In 2004, bankruptcy filings per business day rose in February 2004 and then basically held steady or slightly declined through the spring and summer months. In 2005, the filing rate rose 13% in February, 14% in March, and 15% in April then held steady until the surge of filings to beat the effective date of the 2005 changes in U.S. bankruptcy law. Because of this surge, the fall of 2005 and spring of 2006 are too statistically anomalous to be of any use in trying to find a pattern. Filings trended upward steadily throughout 2006, although the summer months saw some of the slowest rates of increase. It was at this point, back in the early days of Credit Slips, that Ronald Mann advanced the "summer plateau" thesis in one of his guest posts. The pattern continued, with gains again in February and March 2007 with a summer plateau and the filing rate again picking up in October.

We don't have enough data points to make any definitive statements about the monthly pattern. I just wanted to throw the idea out there and make the point that these data bear watching. A December Effect does make intuitive sense to me. With the holiday season, December simply is not the time of year that people will eagerly rush into bankruptcy court. Many files that might otherwise happen in December are simply pushed into the early part of the following year. Thus, it is not surprising to see an end-of-the-year dropoff followed by a surge in the spring.

When I talked about this hypothesis with a colleague, it was suggested that credit card debt perhaps drove this effect as people loaded up their credit cards in November and December and then filed bankruptcy in the spring. Generally speaking, the consumer credit figures do show a peak for credit card debt (what the Federal Reserve calls revolving debt) in December followed by a paydown in January and February. That hypothesis just doesn't fit what we know about how most bankruptcy filers deal with financial distress, generally struggling with creditors for a year or more before filing bankruptcy. If the data continue to bear it out, the simpler explanation for the December Effect is a desire to avoid bankruptcy during the holidays or, perhaps even more likely, the time crunch that many persons feel during December.

For those who want are interested, here is an Excel file (Download MonthlyJan04toSep07.xls) with the AO's monthly filing data and the number of business days in each month as reckoned by me (using the list of federal holidays from the U.S. Office of Personnel Management).


"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."

Overall filing numbers are driven by tax refunds - which a Chapter 7 Trustee will take for creditors if a debtor files late in the calendar year, but which debtors can use to pay attorney and filing fees if they wait until after the refunds are received in the Spring.

Not surprisingly, debtors wait - usually on the advice of counsel.

Expect a big filing wave this tax refund season.

This may not a completely debtor-driven decision. Attorneys and staff at consumer bankruptcy offices take vacation just as the rest of the population does. If there's no one staffing the office, no bankruptcies get filed.

Thank you for both comments, which make me very glad I threw these ideas out there. I'm not sure exactly what's going on. My hunch is the explanations are probably multi-causal.

On the tax refund point, let's play this out for 2008. What will the tax rebates do to the filing rate, if anything? I had seen some tongue-in-cheek remarks that people should use their tax rebates to pay for a bankruptcy filing. Maybe those remarks won't turn out to be so tongue-in-cheek? With the debt problems, do readers think the tax rebates will help drive up bankruptcy filing rates because people will be more able to afford a bankruptcy lawyer?

The tax rebates may delay the filing of some Chapter 7s so that debtors can pay their bankruptcy attorney and filing fee with those funds. Although state cash/wildcard exemptions [or Section 522(d)(5)] will permit many debtors (with good pre-bankruptcy planning) to keep most of their rebate(s) in Chapter 7. Tax refunds are often much larger, and correspondingly more difficult to fully exempt, so there is a big incentive to use the funds before filing a Chapter 7.

The rebates should have little effect on Chapter 13 cases. I doubt Chapter 13 trustees will go after the rebates. (On the other hand, I suspect most Chapter 7 Trustees will go after the rebates as agressively as they go after accrued tax refunds.)

There are lots of reasons for a December dip, especially this year.
1) December this year began on a Saturday, ensuring the maximum amount of weekend days in the month.
2) No one files on Christmas Eve, Christmas, or New Year's Eve, essentially eliminating 3 filing days.
3) 1 and 2 mean that December 2007 had 18 filing days compared to January 2008's 23 filing days (22 if you don't count MLK day, but fewer people probably have off for that)
4) Fewer scheduled foreclosures between Christmas and New Year's - bad pr. So less emergency filings.
5) Lawyers take vacations
6) And the whole tax return thing makes sense, too.

At least through 2004 there was a fairly consistent seasonal pattern to monthly bankruptcy filings: chapter 7 filings show a pronounced monthly peak in March (18% above the annual monthly average), secondary levels in April, May, and again in October (between 6 and 11% above the monthly average). December and January are the trough months with levels from 12% to 15% below monthly averages.

Chapter 13 filings show much less seasonality with a 9% peak in October and secondary peaks in the 4% to 6% range in March and August. December is 6% below the monthly average and is the trough month for chapter 13s.

I have always assumed that the December trough is a wish to avoid unpleasantness during the holidays, and that the March peak in 7s is the holiday bills coming home to roost.

These seasonal factors are computed from time series models of monthly data from January 1980 through December 2004. Whether the post-BAPCPA data will exhibit the same seasonality is anyone's guess right now.

Justin got it right! Every year its the same even before BK reform. People pull in their arms around Christmas and when spring comes around reality sets in and people come to grips with their situations. Because fees for 7s are usually collected up front, tax refunds are a great source of Attorneys fees, filing fees, Credit Reporting fees. All of which are not cheap thanks to Bankruptcy Reform Act of 2005. We are doing twice the work we used to do in 7’s at least. In Texas though there usually is no rush to file chapter 7 in that homesteads are protected by our Texas Constitution. I love that about Texas. So people can afford to wait and pay their fees in payments. Most of the time we call them “feel good chapter 7” because in Texas there is usually nothing a credit card co. can take. They can make life miserable by calling but even then Fair Debt Collections Acts kick in. The debtors my face a possible bank levy but you can see that coming and plan accordingly.

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