Projected Bankruptcy Filings in 2009

Someone asked me about projections for U.S. bankruptcy filings in 2009, raising the issue of whether one can predict the future. Because I can't predict the past, however, we'll have to settle for my projections about the year to come. My track record isn't that bad. Back in February of 2008, I predicted the calendar year would see more than 1 million bankruptcies in the United States. It looks like we'll end up at right around 1.1 million bankruptcies, which is more than 1 million. OK, it's 10% more than 1 million, but that's not too bad.

For 2009, I am expecting a little under 1,400,000 bankruptcy filings. That's an estimate by extrapolating the current filing rates and trends, tempered with a little bit of judgment. The rest of this post will explain how I arrived at that number.

Lower bound: We are now already at a filing rate of over 5,075 for each business day. There are 250 business days in 2009, which computes to 1,260,000 filings. Of course, that computation assumes no growth rate in the bankruptcy filing rate and that seems highly unlikely. Besides the fact that the daily bankruptcy filing rate has grown 54% over the past twelve months, the economic conditions suggest further increases in the rate at which American consumers and businesses will file bankruptcy. This figure thus seems like a reasonable lower bound of what the total filings might be.

Upper bound: If the bankruptcy filling rate grew another 50% in 2009, we would be over 7,600 daily bankruptcy filings. Spreading this growth over the year, we would have more than 1,610,000 filings in 2009. That number would roughly equal the annual bankruptcy filing levels before the 2005 changes to the bankruptcy law. Despite the economic crisis, that number still seems too high for 2009. First, the bankruptcy filing rate probably will not continue to grow at the breakneck annual rate of 50%. At some point, we just run out of people who might contemplate filing bankruptcy. Second, the conditions for a bankruptcy filing are created by layoffs, medical problems, and family breakups, but the timing is largely determined by the availability of consumer credit. As people run out of borrowing options to stave off the day of reckoning, they turn to the bankruptcy courts. If all the government interventions result in at least a partial easing of the credit markets, the growth in the bankruptcy filing rate should ease. Thus, I think 1,610,000 is an upper boundary of 2009 bankruptcy filings.

Middle Ground: We can run a simple regression line (i.e., a trend line) to project bankruptcy filings through 2009. Yes, I know that there are econometric reasons why that is not necessarily a good statistical fit, but it works for a general estimate. Depending on the assumptions one uses, a trend line comes out around 1,350,000 - 1,400,000 bankruptcy filings for 2009. With our economy in recession, the upper end of that range is a better estimate. People are hurting, and it is showing up in the bankruptcy courts.

All Bets Are Off: If Congress passes and Obama signs a law that would give bankruptcy judges the power to modify home mortgages, then all bets are off. Under this scenario, we could expect bankruptcy filing rates to rise dramatically, perhaps to much more than 1,610,000. Although I have heard predictions that such a law might double the number of bankruptcy filings, I do not think that a doubling of the filing rate is a likely outcome. Although the power to modify home mortgages would lead a large number of persons to seek bankruptcy protection to save their homes, we have to remember that prebankruptcy negotiations take place in the shadow of the law. I would expect a significant number of homeowners could use the leverage such a change would give them and avoid bankruptcy by negotiating with lenders to keep a home without a bankruptcy filing.

Comments

[Patches]

A great post Bob.

I agree…..mostly. I would differ a bit on the impact of a “mod” amendment to the code. Given the record number of home foreclosures currently and the inherent potential of a new batch of foreclosures coming from 5 year “Option” arm resets, the run will equal if not eclipse the run in 2005 when we saw 2 mil (as your very handy charts clearly show). The stakes now are way more important than being able to discharge unsecured debt easier. It’s a different world now. Back then the Boom was young and credit card debt didn’t seem so bad. After all people had their “home” savings account “just in case”. Run up a bunch of unsecured debt, take a "second" on your home or refinance. It was easy to refinance and it could stave off foreclosure even get you even (sort of). It didn’t seem to matter back then (not here) that people were paying credit card debt with a 15-30 year mortgage amortization schedule. It wouldn’t be so bad if people these days had one or the other. Theses days people have high credit card balances and high mortgages. Both came easily. Well, its not so easy any more and people will jump through hoops to save their homes or at the very least the chance.

That is just my own humble opinion, a truly unscientific one at that.

[CathyG]

The credit card reforms announced today should take some financial pressure off of people when they're phased in and may help reduce default and bankruptcy. But for reasons that are absolutely unfathomable to me, the Fed has decided to allow pracTices that THEY have defined as deceitful and predatory to continut until mid-2010!!!

Has there ever been a US government that has done so much harm to so many in so little time?

[Patches]

I know Cathy, I saw that on NBC. I guess the lobby got it that the CC companies needed time to re-tool.

[Richard J. Cohen, Esq.]

The projections for increased use of mortgage mod's notwithstanding, the 800-pound gorilla in the room is: the likelihood of a re-default even after the mortgage is modified, since the non-modified and limiting factor of income that did not allow the mortgage-income ratio to work at its original ratio cannot be changed enough to allow most defaulters to be able to pay at the 'modified" rate. The Iron Law of affordability of Home Ownership will not be altered. Of course, if we reverse engineered the mortgage to reflect what was actually affordable, then we could treat the mortgage transaction like a shareholder relationship with the "company", i.e., the bank lender. As we make more, we pay more, and the shared risk of the "company" and the shareholder is truly become marketplace controlled.

[John Warren]

Relief for Main Street, A simple thought. But is it unlikely??

Government is assisting homeowners ( in/ approaching foreclosure) banks and the auto industry. What about the seriously threatened main street middle class, the small business, its owners and employees and those who lease them space? They own homes too, but looming out there is another as yet unacknowledged problem that could dwarf existing. ???? (Question marks - my way of admitting early in this plea for your opinion that I don’t know squat)
To continue-
Sales are down, costs are up, employees must be let go, businesses are closing or considering doing so and landlords like myself are being pinched by gov.(taxes), by insurance co./s (higher premiums- 100/ 200%) and by banks. (insisting on additional ins. coverage that by itself is crippling.)

So main street needs help. Not the give aways we see at the top, or the short term remedies directed at struggling home owners at the bottom, but real help that:
Assists retailers, strengthens retail districts in emerging urban commercial districts,
Reduces rent thereby provides working capital now,(not a give away) that delays the lay off of employees, limits the closing of main-street businesses, reduces vacancies, strengthens community tax base by limiting property value declines, rewards landlords who participate with lower debt costs, which savings will help with insurance, taxes and mortgage payments.

So here’s a thought that could help.
Who qualifies-
Property owners and businesses in urban redevelopment areas, where redev. plans have been implemented, or are taking shape. Plans whose success will reduce the carbon foot print, etc…..

How would it work?-
The program will offer incentives thru community banks, by lending them funds at X , which is then lent to participating commercial borrowers at X+, who can only participate (in loans or refinancing) when they’ve agreed to extend corresponding favorable terms (savings) to tenants, who are participants and do benefit, as lenders must verify and is confirmed by a lease addendum.
Rent could be reduced by $1-$3/SF.
Any chance????
Is anyone looking at this threat?

[Matt]

The numbers of bankruptcies may rise due to websites such as www.filebankruptcyonlinenow.com that just launched which makes filing more affordable to people by charging $199 and giving step by step instructions along with an online book from Nolo.
For all the people out there who can fill out a turbotax program it makes it easier for them to do it so after that catches on we may see a big increase. I heard somewhere that it could hit upwards of 2 million filings.