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Bankruptcy Filing Rate Declines for Second Straight Month: Not Necessarily Great News

posted by Bob Lawless

The U.S. bankruptcy filing rate declined again in January 2009. This was the second straight month of declines, when bankruptcy filings are computed on a daily basis as should be done. Don't be fooled, however, into thinking the news is some suggestion that we are on the road to economic recovery. The decline is a seasonal aberration, and the data hint that the filing rate will again take off in the early spring, as has occurred in the past several years. Before we get to the likely trend, let me report the numbers.

According to data from Automated Access to Court Electronic Records (AACER), there were 89,037 bankruptcy filings spread over the twenty business days in the month of January. That is a filing rate of 4,452 filings per business day, which is a decline of 2.4% from the December 2008 rate of 4,563 filings per business day. The December 2008 rate was in turn a decline of 10.2% from the November 2008 rate of 5,078 filings per business day.

The December and January declines are consistent with a seasonal pattern of lower bankruptcy filings in these months. We saw this pattern in 2006, 2007, 2008, and now apparently 2009. The reasons for the seasonal pattern are not well established. I think it stems from the holiday season, which temporarily lowers filing rates as attorneys work fewer hours and persons simply put off the emotionally draining task of declaring bankruptcy. Bankruptcy lawyers have told me that the seasonal pattern might stem from persons waiting to receive income tax refunds so they have funds to pay an attorney. Maybe both reasons have some explanatory power? The comments are open for further thoughts.

Whatever the reason, the pattern is clear. Bankruptcy filings have climbed in the spring of 2006-2008, and there are reasons to think this historical pattern will hold again in 2009. The January bankruptcy filings were not spread evenly through the month but were clumped toward the end. The last ten days of January had a filing rate of 5,363 per business day. That rate would represent an increase of 17.5% over December and even a 5.6% increase over November 2008, which was the first month since bankruptcy filings were more than 5,000/day since enactment of the 2005 bankruptcy law.

It is dangerous to draw hard conclusions from the monthly ups and downs of the bankruptcy filing rate let alone from the ups and downs of only ten days. The data have a lot of noise and random fluctuations. The evidence, however, strongly shows a seasonal pattern in the monthly filing rate, and the seasonal pattern appears to have shown up again in 2009. The last ten days of data are consistent with that pattern. For these reasons, I remain confident in my earlier prediction of around 1.4 million bankruptcy filings for the 2009 calendar year and which would require a daily average of about 5,600 bankruptcy filings. The most recent data show that we already are very close to that figure. If anything, the estimate might prove to be too low.


Buying lots of gifts is a Holiday thing
The time to discharge all those debts in the Spring
Got to pay the attorney and the filing fees
Those tax refunds come and make it a breeze!

What were the Chapter 7 versus Chapter 13 numbers? I'd bet that Chapter 13s were down, with many people waiting on the mortgage modification legislation to pass.

Chapter 13 filings were 32-33% of total filings, which is precisely the same percentage as they have been for about the past year.

In our office January saw 22 total filings 21 of them were 13s. We could have filed about 10 more (mostly 13s) but we had our main attorneys out of the office for eye surgery. Of course we were in triage mode, filing the most desperate ones first, even working on the weekends. We just haven't had much call for 7s lately. Usually we have more than 5-8 chapter 7s in a month of 20 or more total filings.

I have had a few (3-4) mentioned the coming legislation but those were the more sophisticated debtors. Of those 3-4, 1-2 wanted to know that the legislation was a for sure thing first. The others couldn't wait. We would have actually seen an increase in filings if not for illness and rescheduling of filings.

Consistent and growing is the consensus from our office and we (our area) were supposed to be somewhat insulated from the turmoil going on. I am beginning to think that while we have not seen the dramatic increases and decreases in home values, even the slightest change has a dramatic effect. The same can be said for foreclosures. It may not be as bad as the East or West Coast; it is still dramatic to our locals.

I believe the current filing trends and even in the last quarter of 2008 were influenced by forclosure moratoriums or stays that suspended continued foreclosure actions. When, and if, these are eventually removed it is likely there will be significant increases in filings.

If I were contemplating bankruptcy, I'd do what I could to wait a few months to see whether Congress will pass cramdown legislation. If I'm going to file anyway, I'd rather do it under new laws that may allow me to keep my house.

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