Half-Empty or Half-Full: The February Bankruptcy Figures

Pick which blog post you want to read:

The year-over-year increase in bankruptcy filings for February hit its lowest mark since the trough in filings after the 2005 changes to the bankruptcy. February saw only 6,170 filings per business day which was a 13.3% increase over February 2009. The rate of increase in bankruptcies is leveling off, possibly indicating a brightening financial picture for the middle class. The February figures continue a trend that has been developing over the past several months, as discussed in the blog post discussing the January figures and its accompanying graph.

Or, if you would prefer:

The daily bankruptcy filings in February (6,170) hit its second-highest point since the 2005 changes to the bankruptcy law. February daily bankruptcy filing rate was a 14.2% increase over January. If the trend continues, 2010 will be a record year for bankruptcy filings, possibly even eclipsing the aberrational year of 2005 when people filed in a rush to beat changes to the bankruptcy law. These figures show a deteriorating financial picture for the middle class.

The figures in both paragraphs are accurate. It's all in how you pitch it, and if you read the blog regularly, you will remember me bemoaning the often hyped-up presentation of the bankruptcy figures just to create sensational headlines. To get a balanced sense of what the bankruptcy filing figures are telling us, there are a few key points always to keep in mind.

(1) Don't confuse the legal action of "bankruptcy" with the underlying condition that creates. Financial distress is the underlying condition. Guest blogger Jim Hawkins raised questions about whether the term "financial distress" is the right one. If you don't like "financial distress," then for our purposes here "lack of cash" will do.

(2) Bad economic figures, especially unemployment which is often cited, do not indicate an immediate and proportional increase in bankruptcy filings. The converse is true--bankruptcy filing data are not a direct and immediate measure of economic well-being. People do not file bankruptcy the day they get laid off. They generally struggle for a long time with the financial distress that comes from unemployment. Our work suggests that almost half of bankruptcy filers feel they struggled financially for over two years. The triggering event that leads someone to walk into bankruptcy lawyer's office is different for different people, but for many people it often has to do with the unavailability of further credit.

(3) Bankruptcy filings are cyclical through the year. This paper from Professors Mann and Porter--aptly titled "Saving for Bankruptcy"--explores in great detail how persons often save up for bankruptcy. The February increase is part of the cycle, but it's not as great an increase as in past years.

Overall, the situation is a "half empty/half full" thing. Bankruptcy filings are headed toward five-year highs. For the past two years, the first two months of the year have had 13.2-13.3% of all filings for the year. If that pattern holds, we'll have about 1.65 million filings this year. That will be very close the per capita rate before the 2005 changes went into effect. That is hardly great news.

At the same time, the 2005 changes to the bankruptcy law did nothing to change the underlying reasons why people file bankruptcy. It is hardly surprising that we are at or near a per capita level of filing that had been sustained for years before the 2005 law went into effect. With the amount of consumer debt, we have to expect high bankruptcy filing rates. In the long-term, if consumer credit remains tight, then that will drive down the number of persons with the sort of debt that leads them into bankruptcy court.

Comments

[Lillie]

Very interesting figures. With the pre- and post-screenings it would seem that there would some significant changes. The economic situation may have played a bigger factor, i.e., job loss, downsizing, reduced hours, to name a few causes, in why consumers are continuing to seek bankruptcy or some type of debt relief as an option. The key continues to be early financial education, in my opinion, but still unforeseen circumstances can get a situation out of balance.

[Scott McKay]

I think it's also important to point out the fact that it has been statistically shown that many bankruptcies (over half by most studies) are partially due to medical bills and expenses. People are having a hard enough time just keeping up with their monthly bills right now but when you throw a major medical emergency on top of that, especially for someone with no medical benefits, it may seem impossible to keep up with everything.