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Bankruptcy Filings Are Down -- Everywhere

posted by Bob Lawless

With half the year over, there is half of the year still to go. For our few readers who might actually know the quote--yes, that is a tribute to the legendary Murray Walker. Giving our place in the calendar year, it seemed like an appropriate time to look where things stood with bankruptcy filings.

According to data from Epiq Systems, there were 632,130 bankruptcy filings in the first half of 2012. Using a sophisticated mathematical model where I multiple that figure by two, I get a projection of approximately 1.25 million bankruptcy filings for the 2012 calendar year. That projection is slightly too high because filings in the first half of a year historically are slightly larger than in the second half. If the past few years are a good guide, it looks like there will be just above or below 1.2 million filings in 2012. If that projection holds, there will be a 13.0% year-over-year decline in the bankruptcy filing rate.

My original intention for this post was to write about the states where bankruptcy filings have defied the trend and have actually increased. The facts, however, got in the way. For the first six months, bankruptcy rates have fallen in every single state. The biggest declines are in some of the places that had the biggest jumps in bankruptcy filings in the past few years: Nevada (-27%), Arizona (-23%), and California (-22%). These declines look a lot like regression to the mean. Other states with big declines (Hawaii, Alaska, North Dakota) are states with small populations and low bankruptcy filing rates, and these declines look a lot like the statistical noise that comes with low base rates and the relatively higher variance that must follow.

To my eye, the state-to-state differences look to be mechanical results from the broader national pattern, and about the most insightful thing I can say about the geographic variation is "what goes up must eventually come down." At the aggregate national level, the trend most likely continues to be a result of better consumer credit markets giving consumers the option to continue borrowing rather than going to bankruptcy court. We are currently running at a bankruptcy filing rate of 4.46 per 1,000 persons, off substantially from 2004 when the rate was 5.44 per 1,000 persons. If consumers continue to have easier access to credit markets, the bankruptcy filing rate should continue its downward trend for the foreseeable future.

Comments

Bob,
Thanks for this breakdown. What great news!

How do you attribute these declines to consumer awareness? Do you think that the housing bubble burst and recession caused homebuyers and consumers to do their homework? Interested to hear your thoughts.

-Christian L.

Declines in bankruptcies should be associated with stronger lending standards rather than easier credit. I don't understand the logic of the last sentence of the post:

"If consumers continue to have easier access to credit markets, the bankruptcy filing rate should continue its downward trend for the foreseeable future."

How can this statement be reconciled with the fact that bankruptcy rates were at relatively high levels in 2004 when we had the easiest access to credit in history?

The easiest way to put someone into bankruptcy is to loan money that cannot be repaid. Many lenders did this from 2002-07 because they found a way to get rid of the credit risks associated with these "liars’ loans" and the like. Investors and taxpayers absorbed these risks.

Bankruptcies are declining today because lenders strengthened standards after 2007 - not because they've eased them since 2010. Short-term, those increased standards appear to have "caused" some bankruptcies from insolvent people who could not refinance their liar’s loans. However, the real cause of those bankruptcies were the liars loans with complex terms that left borrowers with sharply increased payments after a few years and no choice but to refinance or go bankrupt. You can't blame those bankruptcies on tougher lending standards that would not allow those "insolvent" folks to refinance.

Easier credit will lead to increased bankruptcy rates after a few years. Tougher credit may lead to higher bankruptcy rates in the short term but rates will fall after the insolvencies precipitated by lax standards work through the system.

Greg Taylor: I agree with a lot of what you write. My analysis was meant as purely statistical and predictive, not normative. Historically, tougher credit leads to short-term increases in bankruptcy filing rates but long-term declines (and vice versa). This is the paradox of consumer credit.

Christian L.: No, I don't think the decline in bankruptcies has anything to do with consumer awareness. I think it has everything to do with the availability or lack of consumer credit.

I see two forces causing the downward trend. First, credit is available, albeit on absurd terms. Although increased borrowing will eventually put a large number of these folks into bankruptcy, right now they can once again play kick the can and borrow to move their cash flow problems a little farther down the road. It's creating the next wave, which is not far off (I'm a small claims judge for several jurisdictions, and the collections dockets are already full.), but it keeps present rates down.

Second, as Dylan put it, "If you ain't got nothin', you got nothin' to lose." People without assets to seize, without bank accounts and pay checks to garnish, don't have much need for bankruptcy protection. When they land a job, they're in an attorney's office seeking protection the minute the garnishment writ hits their employer. But if they don't have a job, or it's all under the table, I won't be seeing them.

I think we will get back to Biz once unemployment dips a little more. Then again people could be out of work for so long that....they have nothing else to lose. Homes, Cars..etc.. But the debt will still be there though, so I think 7s will come around faster than 13s. Talked to a friend of my with our local 13 Trustee's office and they have been holding off on dismissing cases because of the slowdown. She told me that they were closing more cases than were being opened and if that trend continued they would have to cut staff. They don't want the UST to force it so... cases are not dismissed right away. It gives us time to get the Debtors in to modify.

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  • As a public service, the University of Illinois College of Law operates Bankr-L, an e-mail list on which bankruptcy professionals can exchange information. Bankr-L is administered by one of the Credit Slips bloggers, Professor Robert M. Lawless of the University of Illinois. Although Bankr-L is a free service, membership is limited only to persons with a professional connection to the bankruptcy field (e.g., lawyer, accountant, academic, judge). To request a subscription on Bankr-L, click here to visit the page for the list and then click on the link for "Subscribe." After completing the information there, please also send an e-mail to Professor Lawless (rlawless@illinois.edu) with a short description of your professional connection to bankruptcy. A link to a URL with a professional bio or other identifying information would be great.

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