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.

Although August's 2.2% increase may seem small, the figure is deceivingly low because it actually translates into a 29.2% annual growth rate. In other words, if bankruptcy filings increased 2.2% each month of a year, the total bankruptcy filings for that year would be 29.2% greater than it was the previous year. (Because of compounding, the calculation is not as simple as taking 2.2% times twelve months.) This is a tremendously high growth rate in bankruptcy filings. At this growth rate, bankruptcy filings in 2009 would be over 1,300,000.

People often ask me why I think bankruptcy filings are rising. My answer is that it is both simple and complex. The simple answer is that hard economic times obviously contribute to rising filing rates. Tightening consumer credit markets also lead to short-term increases in bankruptcy filings as consumers find it difficult to borrow more to stave off the day of reckoning. That is the simple part. The more complex part of the answer is that we know people do not file bankruptcy immediately upon the onset of financial distress. Typically, consumers struggle for a long time--often two or more years--before filing bankruptcy. The job loss today or the harassing calls from creditors may precipitate a bankruptcy filing, but the seeds of that bankruptcy filing were sown long before it shows up as a statistic in the bankruptcy filings.

Comments

[Steve Rhode]

Bankruptcy reform was such a bloody waste of time and seems to have not done much except further punish consumers in trouble. It won't be long now till filing rates are right back where they were in 2004. Let's just hope a future red administration doesn't feel a need to fall under creditor influence to make it even tougher, yet again.

[Steven Weiss]

These stats are no surprise; simply stated, the law changed, but consumers' personal economies did not. I'll be very interested in a couple of years when somebody does a study to see if the dividends to creditors in consumer cases post-BAPCPA (7's and 13's) were any higher than before BAPCPA. I suspect there will be no meaningful increase. If that turns out to be the case, the only lasting beneficiaries of the law will be the "non-profit" credit counseiling agencies.

[Albin Renauer]

The banks still win under BAPCPA even if the dividends in bankruptcy are unchanged, and even if the filing rate creeps back to old levels. As Ronald Mann has pointed out, and as mentioned in this blog, banks and others have the most to gain from BAPCPA by causing debtors to delay their bankruptcy at a point when they are at their highest point of delinquency, and fees and interest are at their highest point. That is where they reap their real benefit -- not necessarily from the dividend paid in a bankruptcy proceeding.

[apj]

What is the difference between AO and AACER data? That is, if it is so bad (and I think it is), BK's will still be lower than all the previous years on your chart. Does the data portend, then, a very poor 2009?

[Patches]

Albin- If you are talking 7 and farming the debt to debt buyers then maybe they would get a little more. In a 13 the % of recovery may be a little higher but what I have been seeing is that 1/3 to 1/2 never file POCs anyway or file them late. Maybe banks can write down a higher number.???

Anyhow, we are filing allot more 13s than 7s. In August we had 1 “chapter 7 filing” out of 27 bankruptcies. 7s are just too darn complicated these days for the money. Another contributing factor is that most of the people who filed with us in August wouldn’t be helped by a 7. ie. Foreclosures, and/or they were over the median. Most people I talk to who have never filed or even thought about filing bankruptcy still think that "because of the new law", they can't file. That or they would lose everything if they did.