Bankruptcy Filings Still Falling

On a year-over-year basis, the bankruptcy filing rate has been dropping around 12-16%, and last month was no exception. According to the most recent data from Epiq Systems, the daily bankruptcy filing rate in July was 4,622. That represents a 16.1% decline from the same time last year year and a 2.0% decrease from June.

We continue to be on track for just above or below 1.2 million filings for the 2012 calendar year. That will be a 13.9% decline from 2011 (1.38 million filings), which in turn was a 13.6% decline from 2010 (1.56 million filings).

The graph to the right shows the year-over-year changes since July 2008. (Clicking on it will bring up a larger version in a pop-up box.) The huge increases in 2008 were the lingering effects of the BAPCPA, the 2005 changes to the bankruptcy law. The filing rate was still recovering from the huge and artificial rise and then drop in filings around the time of the law's passage. Since November 2010, however, the year-over-year changes have been consistently negative and have been in the -12% to -16% range since May 2011. At what point will these declines stop?

Comments

[David Fuller]

I wonder if there will be an upward in late fall 2013, when the 8 year waiting period passes for all those debtors who rushed in before the BAPCPA effective date.

[chris m]

I wonder if the decline in this rate is attributable in part to the disinformation campaigns of debt setllment agencies that seem to have accelerated over the last few years. We have been bombarded with fruadulent ads extolling the virtues of "debt settlement" over bankruptcy, as a means of resolving delinquent debt.

[Raymond Bell]

What is wrong with bankruptcy filings going down? Still would like to know the influence in the numbers, if any, on refiling another case after the initial case is dismissed or converted.I believe the trend will either continue to be lower or remain flat unless Congress passes either/or cram down in chapter 13 cases or allows for profit student loans to be discharged.

[Bob Lawless]

There is nothing wrong with bankruptcy filings declining. I did not mean to imply otherwise -- just trying to figure out where the trend is going.

[David Fuller]

Filings may also remain flat because, at least for a large segment of my clients, bankruptcy has a lower economic utility. Based on Schedules I&J in many of my chapter 7 cases, some debtors will continue to run a substantial deficit post-discharge. These are also debtors who easily qualify for chapter 7 - below median on the primary means test - and who do not struggle to get their monthly net at or close to $0.00 on schedule J. Instead, these are debtors who are spending less than the IRS guideline amounts on food, clothing, etc and still run substantial deficits.

I've never practiced bankruptcy in a healthy economy. My perception was that even if a debtor showed a negative net income at the time of filing, they had some reasonable expectation of their situation improving. Given the length, breadth, and depth of the ongoing financial crisis, most of my clients are not particularly hopeful that their finances will change. Practically speaking, this means that fewer of my clients are filing chapter 7 just to get the fresh start, i.e. recover from periods of unemployment, medical expenses, a divorce, or business failure.

As recently as early 2011, the majority of my chapter 7 filers were trying to "move on with their lives." Since last fall, I've notice a distinct shift to people who are filing chapter 7 in response to a direct external stimulus, typically a lawsuit or garnishment.
Additionally, fewer of my chapter 13 filings are for debtors curing an arrears or reorganizing after a small business failure. Now more of my chapter 13 filers are people who can't pay a chapter 7 retainer in time to stop a garnishment or people who don't qualify for another chapter 7 but need debt relief.

None of this is statistical analysis of my clients and may be subject to observation bias or something unique to the Western District of Washington. Nonetheless, my perception is that bankruptcy is being used less for the fresh start and more as a financial last resort. This is due, in large part, to cost of living versus actual income. Significantly, I'm seeing more and more people who have lost all of their overtime or who are contract employees. Until the income expense ratio improves, my guess is that I'll continue to see a large cohort of crisis filers. Once that ratio improves, I expect to see an increase in volume founded upon people who want to get the last few years off their credit report and rebuild.

[bmh]

Another possible reason for an apparant decrease in the utility of filing a bankruptcy has to do with the increased number of filers with student loan debt as a significant part of their liabilities. As that debt is not dischargeable, there is not a lot of benefit to those debtors from filing. Over time, as student loan debt becomes an increasing percentage of peoples debt load, the utility of a bankruptcy filing will continue to decrease.

-bmh

[David Fuller]

@BMH - I agree. I'm seeing more people with student loans come into my practice. Fortunately, the 9th Circuit has held that bankruptcy judges may grant a partial discharge of student debt. It gives debtors some bargaining leverage, Since the court doesn't have to apply the Brunner Test as an all or nothing proposition.

[Salle Mae serf]

Flings are picking up in my office, in fact, in the last month, it's been crazy busy. Just insane actually. I'm feeling like its 2007 all over again. I filed six cases last week which for me is a lot because I usually only file two a week.

There are still trillions of dollars of consumer debt out there and incomes are dropping. Unemployment is still high. In the short term filings have been dropping but in the long run it has nowhere else to go but up.

Of note, I have number of people who will be filing next year on the 8 year anniversary of the BApca in 2005. In fact, I plan on starting my own practice next year in anticipation of the surge in filings I expect when the economy double dips into recession. I can feel it coming, we are the soldiers in the trenches and we see what's happening on the ground.

[Knute Rife]

My experience exactly reflects David's. The only difference is that Washington has considerably stronger consumer protection laws than Utah (I've practiced in both, so I'm not just talking through my hat.). The people coming to me are the lucky ones who have found work and have a paycheck to garnish. Too many people have nothing left for a creditor to go after. We may see a surge of eight-year repeaters coming up, but without a turn-around on the jobs front, that's all we'll see. As Dylan sang it, "If you ain't got nothin', you got nothin' to lose."

[Patches]

idk. I think 1997 for us in South Texas was just as busy as 2007. It's dipped down here too but the local economy is booming right now. Lot's of oil and gas start ups with the "eagle ford" shale production increasing every day. It's so fickle though. The pay is good but once those commodities drop so do the jobs...almost overnight.

Boom and bust we have always been busy but the drop in filings recently really scared me at first. It almost felt like the bottom falling out. People holding back..basically holding on to what little cash they had left.

In Texas we too have great consumer protections, so it's not unsecured creditors driving the filings. It seems as if people are resigned to losing their homes and they are ok with it. I mean there are some really great looking apartment complexes going up around town.

The old timers in oil and gas are milking it because they know its not going to last. They tell me stories of oil boom and subsequent ghost towns of the 80s. Get while the getten is good. It's the nature of the Biz. Where would be in the BK world without all of those oil, gas and railroad BKs? It's coming.