No Surprise: Bankruptcy Filings Jump in February

Bankruptcy filings rose in February, but the spike in filings keeps with historical trends. According to data from Epiq Systems, there were over 104,000 bankruptcies in February 2012. Spread over the 20 business days during the month, the daily February filing rate was 5,221 as compared to only 4,399 in January. This is a rise of 18.7% in one month, a matter of concern perhaps at first glance but no surprise on further analysis.

It seemed time to update a chart I have used in the past. The graph to the right shows month-to-month changes in the daily U.S. bankruptcy filing rate from 2008 through 2011. Late winter and early spring always see a spike in bankruptcy filing rates -- the cylicality persists even in previous years.

The graphs also show an amazingly consistent trend where the daily bankruptcy filing rate slowly erodes throughout the year. A simple regression on each year implies that the daily filing rate erodes an average of around 1.3% each month from its high in the early part of the year. This downward trend over the course of the year is true even in years like 2009 and 2010 when the total annual bankruptcy rate increased as compared to the previous year. Thus, when bankruptcy filings go up on an annual basis, the bulk of the increase comes in the early part of the year.

Looking at where we have started, it looks more like 2012 will see another decline in bankruptcy filings. Instead of an increase, bankruptcy filings continue to go down. On a year-over-year basis, the February 2012 daily filing rate is a decline of 9.5%.

Although it is still early to put too much stock in such an analysis, extrapolating the filing rate for the first part of 2012 suggests that there will be just under 1.3 million total bankruptcy filings for the year. For comparison, in 2010, just two years ago, annual bankruptcy filings were 1.56 million.

The reason for the decline is two-fold. First, there was less consumer borrowing happening in 2008 and 2009, leaving less of an "inventory" of debt for bankruptcy discharge today. Second, consumers who are living close to the financial edge and who might be candidates for bankruptcy are finding it a little easy to come by more credit today than was true a year ago. This marginal extra bit of liquidity can be enough to stave off a bankruptcy filing. Looking at the long term -- two or three years out -- I would expect to see bankruptcy filing rates begin to move back up as consumers' balance sheets begin to fill back up with debt. Any contractions of the availability of consumer credit also are likely to lead to increases in the bankruptcy filing rate.

Comments

[AMC]

Still think it is "multi-causal" or have you come around to the idea of the tax refund driven filing season?

http://www.creditslips.org/creditslips/2008/02/the-december-ef.html

[Bob Lawless]

Hey, "multicausal" is a no-lose, default proposition for any social phenomenon!

The tax refund explanation has intuitive appeal and is backed by data Katie Porter and Ronald Mann's paper. Here is my hesitation -- timing. Isn't a February spike too early for this to be driven largely by tax refunds?

I'm asking . . . I really don't know.

[AMC]

Many people who are getting refunds file their returns very early - as soon as they get their W-2s they are off to the tax preparers.

And if you file electronically, the refund comes pretty fast.

Does the filings-per-day rate pick up as it gets later in the month of February? Gotta get the attorney paid before he/she will file.

I'd even expect a "spike" in the last few days - don't want to have to redo your means test if you don't have to.

[AMC]

Of course, if you want to stick with "multi-causal" - it really is a combination of Christmas bills and tax refunds.

But you can't file on January's Christmas bills until your get February, March or April's tax refund to pay for your bankruptcy.

[Ken]

It does not apply to Chapter 7's, but in the Chapter 13's I have seen the majority of filers this year have not yet filed their 2011 taxes.

But most attorneys do not require a significant up front payment for 13's here, it might be different elsewhere.

[Katie Porter]

Our Saving up for Bankruptcy paper, available on www.ssrn.com if anyone is interested, talks about how bankruptcy filers usually file quickly to get their refund quickly--and have those refunds in hand in February. That is what the attorneys tell us their clients do. Similarly, AMC is correct that there is an end of the month spike, which in our Saving up for Bankruptcy paper, we explain that our research suggests at least in part comes from efforts to avoid having to redo means test paperwork. The other explanation for end of the month spike is a paycheck effect.

[Patches]

Ya you really don't want to have $4-8k in tax refund in the bank when you file 7, especially if you have used all of your exemptions. Wild card only goes so far. We saw a noticeable increase in Feb. filings. We saw more 13s than 7 tho. AMC a while back said something that might be driving filings as well...Something about filing when things are looking better....ie. People finally obtaining jobs or better paying jobs. As I look back though Feb. and early March always were pretty good for filings.. On the micro level, if I had a dime for every potential client saying "our income tax refund is coming so that's not a problem".....There is more than a casual link..