October Bankruptcy Filings Set New Post-2005 Record

The daily bankruptcy filing rate in October hit 6,200, setting a new record since the 2005 changes to the U.S. bankruptcy law. There were about 130,200 total filings spread over the 21 business days in October. The October filing rate is a 3.7% increase from September and a year-over-year increase of 25.3%. As always, these data are courtesy of Automated Access to Court Electronic Records (AACER) There are two ways to receive this news, both of which have some validity.

First is the "glass is all the way empty" approach, that the rise in the bankruptcy rate reflects the poor health of the economy, results from rising unemployment, and is a sign that the U.S. consumer is not as healthy as recent figures showing GDP growth might suggest. Although I continue to think that the primary short-term driver of ups and downs in the filing rate is the availability of consumer credit, there is no way to look at record bankruptcy filing rates and not see problems for the U.S. consumer.

It also right to look at these data as saying the "glass is only half empty." This is not the same as saying the most recent data should be interpreted optimistically, that is the glass is half full. Rather, it is a subtle and complex story trying to draw a distinction between "dire" and "not good."

The graph to the right shows the month-to-month change for the past three years. (I have omitted 2006 because, and especially for the early months that year, its bankruptcy filing trends were greatly affected by the 2005 changes to the bankruptcy law.). The graph shows seasonality in the bankruptcy filing data -- sharp rises early in the year and a decline toward the end of the year. Part of the seasonality has been an increase in the fall of each year, and the October 2009 figures fit that pattern.

Another data point is to consider the 25.3% year-over-year increase that the October 2009 data represents the second smallest year-over-year increase in the monthly filing data over the past three years. (The smallest is 21.3% in January 2008.) Yes, bankruptcy filings went up as compared to the same time last year, but they have been on a steady trend back toward their pre-2005 levels ever since the changes to the bankruptcy law. In fact, the rate of increase in that trend appears to be slowing.

Again, I feel compelled to reiterate that I am not saying everything is peachy-keen. It's just that if you are looking for "sky is falling" economic indicators, then you are looking in the wrong place if you are using the bankruptcy filing numbers. What would be really meaningful are bankruptcy filing statistics that do not follow the season patterns of the past few years. Watch to see whether bankruptcy filings drop in November and December and then rise sharply in January and February. That will tell us whether the bankruptcy filing rates are extraordinary or part of the usual patterns.

With only two months left in the calendar year, the projected 2009 total bankruptcy filings is starting to look like it will come in right around 1.45 million. Back in December 2008, I predicted total 2009 bankruptcy filings would be a little under 1.4 million with an upper bound of around 1.6 million. That was not too bad as far as predictions go. For 2010, I think 1.6 million bankruptcy filings might be a good lower boundary of an estimate for projected total bankruptcy filings--more on that later. In the meantime and for the record, here is where the 2009 projections stand:

• 1,448,000 filings if bankruptcy filings continue for the rest of the year at the same daily rate (5,769 per day) as they have averaged for the first ten months of 2009
• 1,455,000 filings if bankruptcy filings continue at the same daily rate (6,200 per day) as they have averaged for October
  
• 1,461,000 filings if bankruptcy filings for the remaining two months of 2009 constitute the same proportion of total filings as the last two months of 2008 constituted for total filings that year (about 17.1%)

Comments

[Noni Mausa]

Where could I find numbers for the maximum possible numbers of bankruptcies at any one slice of time? That is, if there are 100 families and 10 file for bankruptcy, the maximum number would have been 100, of which 10% filed.

But if 50 of the 100 have already filed, last year or the year before, and another 10 filed, then the number would be 20%.

And -- when does bankruptcy become normative?

Noni

[Kevin R. Anderson]

I'm seeing similar trends in Utah both as to increases and seasonal fluctuations. From April through October of 2009, Chapter 13 filings have tracked very closely with filing rates from 1999. Historically, filings decline in November and December. I agree that the number of filings over these next two months will be more telling if anomalous financial forces are at work.

[Patches]

We had a huge month in Oct. Mostly 13s as has been the trend this year.

Bankruptcy and Normal filing rates...? I think in good economic years the more credit being issued; the more risk in the markets, you will have a certain equalization through bankruptcy. I think what we are seeing now is just the tip of the iceberg. Bankruptcies were artificially repressed for the past 4 going on 5 years and in that 4-5 years we had a boom and a bust. The current bankruptcy laws may be holding our economy back instead of moving it forward in that people with better then average income will be kept out of the game for 5 years in 13s. Under the old 7 prerequisites people who have been laid off may have had a better chance at 7 but now because of the "means test" it will push those same debtors discharges 6-9 months or in a 13, 60 months further down the road.

[mt]

Bankruptcies would seem to be a lagging and not a leading economic indicator. The fresh start policy doesn't compute if they are a leading indicator.