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Crystal Ball Department: Bankruptcy Filings to Rise in a Few Years

posted by Jean Braucher

Good times in the economy mean goods times a few years later for bankruptcy professionals who deal with consumer cases.  We saw this from the mid-1990s through the 2000s. The last big party in the bankruptcy world was in 2010 (1.5 million non-business cases filed!), a few years after the end of the last debt binge came to a crashing halt starting in 2007.  The reverse is also true.  Bad times in the economy make for fewer bankruptcy filings a few years later, which is what we have been seeing lately.

Those of us who blog on Credit Slips get frequent calls from reporters asking about bankruptcy filing statistics, specifically:  what do they mean?  Filings, which are mostly consumer filings, have gone down steadily for two years now, so it gets hard to come up with anything new to say, as Bob Lawless recently wrote here.

When filings go down, reporters new to the bankruptcy beat often think that means the economy must be getting better. Wrong. What drives bankruptcy filings is debt.  Decreases in debt are followed a few years later by decreases in bankruptcy, and increases in debt are followed by increases in bankruptcy.  The Great Recession that started in 2007 resulted in a great decline in household debt due to a combination of reduced access to credit and consumers voluntarily cutting back on debt-driven spending because of a lack of consumer confidence.

It’s so old hat to talk about the continuing decline in bankruptcy filings, produced by a long process of household deleveraging (meaning taking on less debt and instead paying off old debt), that I’m going out on a limb with a prediction. We may finally be seeing signs of a reversal in progress—consumer confidence going up, which should drive up debt volume, and presto chango, we’ll see more bankruptcy in a few years. Bankruptcy attorneys, take heart: recovery will mean a return to your good times, too, but a few years hence. 

What are the signs? After rising two months in a row, consumer confidence is the highest it has been since February of 2008, just after the beginning of the Great Recession.   Because consumer spending is the single biggest driver of economic activity, growing consumer confidence is closely watched as an indicator of economic expansion.  Confidence is still low compared to levels in good economic times, but the trend line is up.   On the other hand, superstorm Sandy may shake consumer confidence in the East in the short term, especially among those who lost hours on the job.  But soon Sandy is bound to drive huge spending on reconstruction, and some of that will be with borrowed money.

I certainly don't think it is a good thing that growth of our economy depends on debt-driven consumer spending.  But as Walter Cronkite signed off every night, often with sardonic intent, "That's the way it is."

In addition to consumer demand, there’s another component to recovery: credit supply.  There are signs of upward movement there along with in demand, seen in nonmortgage credit: household debt increased in the second quarter of this year at the highest rate since the beginning of 2008.  See here.  Mortgage credit is still tight, but overall access to credit (aka debt) seems to be up.

Once full steam recovery kicks in, with credit supply meeting demand, bankruptcy filings will be up again, too—in a few years.  In 2016 or 2017, the bankruptcy world may be partying like it's 2010.


More Bankruptcies are baked into the cake. Our entire economy is based upon and runs on debt. Even for a guy like me, between student loans a mortgage and a car note, I have more debt than i can ever reasonably be expect to pay in a lifetime. And I'm one of the prudent ones. There are far more profligate debtors than myself and their debt will never be repaid. It will all end in default and/or bankruptcy. Debt permeates society from the poorest with payday loans to the highest earning with million dollar interest only jumbo mortgages. Its mostly just a facade or a veneer of wealth hiding the enormous det obligations that cannot and will not be repaid. The Great Recession is also the great reset as deleveraging will continue for a generation or more. Student loans alone will continue to drive younger generations into debt that will never be repaid. I routinely file bankruptcies for young debtors to discharge credit cards so they can focus on paying off the student loans.

Think about that, I live in a dual income household with an income in the middle one hundreds and we have 350,000 in debt. We are in our 30's. we have 90k in student loans, down from over $220,000 in the mid2000s at graduation time. Plus a $260k mortgage for a modest single family home in a good area, which we bought at the bottom of the market. Plus a car note. Debt debt debt. The alternative is to spend my money on rent that more or less matches the mortgage payment and drive older cars that are unreliable. And we have perfect credit scores too. There are far more debtors with less diligence who are older. How can anyone ever be expected to repay all this debt? It's insane how messed up the system is. More bankruptcies and defaults are baked into the cake. There's no way around it.

I forsee increase of Ch 7 filings after October 15, 2013.

the imperialist creditor nations -- which placed themselves permanently in charge of the IMF and World Bank when they created them after WWII

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