The Last U.S. Bankruptcy Filing -- October 11, 2018

After some fancy computing, it appears the last U.S. bankruptcy filing will occur on October 11, 2018. The model suggests it will occur about 10:00 PM, although there is a margin of error such that we should allow for anything between 9:00 to 11:00 PM. These projections are based on the latest bankruptcy filing figures, which continue to show a downward trend for the 25th consecutive month.

In November the daily bankruptcy filing rate fell 11.8% on a year-over-year basis. There were almost 87,000 total U.S. bankruptcy filings spread over the 20 business days in November, which makes for a daily filing rate of 4,347. The last time the daily filing rate was lower was June 2008. As always, thank you to Epiq Systems for providing the data. 

 Obviously, the downward trend in bankruptcy filings is good economic news. No one thinks it is a great thing when more people file bankruptcy. Household debt, however, inevitably will mean bankruptcy for some. At some point, the downward trend will have to stop, even if a simple trend analysis suggests the end of U.S. bankruptcy filings in October 2018. The "natural" level of U.S. bankruptcy filings is not zero. The question is when will see the bankruptcy filing rate level off or even begin to rise again.

Past U.S. data and data from other countries demonstrate that, as households have more debt on their balance sheets, bankruptcies will rise in the long run. Also, there appears to be a liquidity effect in the past with rising consumer borrowing leading to a temporary depression in the bankruptcy filing rate.

I am beginning to wonder whether these past statistical patterns will continue to hold. Our financial crisis created truly unprecedented conditions, at least when it came to consumer credit. During the height of the financial crisis, for example, the amount of consumer credit actually fell. For the sixty years prior to that, "tightening" of consumer credit meant only that it did not rise as meteorically as usual.

Several bankruptcy attorneys have suggested to me that another factor is the lengthening in 2005 of the time between bankruptcy discharges from six to eight years. The big spike of persons who filed bankruptcy just before the 2005 changes in the law went into effect are thus not eligible to begin refiling until mid- to late-2013. If around 16% of the bankruptcy filings are from repeat filers, as Golmant and Ulrich found in a study using 1993-2002 data, then their absence from the bankruptcy system may almost entirely explain the 10-16% drops we have been seeing in filing rates. One flaw in this reasoning is that the extension of successive discharges did not take effect until October 2005, but the bankruptcy filing rate began dropping dramatically about six months before that, in May 2011. The repeat filer phenomenon thus would seem an incomplete explanation.

My instinct is that there is truth in both explanations. The unprecedented economic conditions make statistical models from past data an unreliable predictor of current bankruptcy filing trends and the current dearth of repeat filers is further depressing bankruptcy filing rates. I suspect that, in 2013, the downward trend will level off, if not reverse into a slight increase. That is a personal judgment, however, based more on instinct than data. As I work with the data and if I come up with what I feel is a reliable data-based forecast for bankruptcy filings, it will be posted here.

Graph image from Shutterstock.

Comments

[Knute Rife]

I'm so glad BAPCPA successfully rid us of that pesky business cycle and everything will be endless growth from here on. The legislation was brilliant after all.

[Ken Doran]

If the weather pattern in the northern hemisphere over the last few months continues on course, we will be in a major ice age by the middle of next year.

[D]

When BAPCPA was being considered by Congress, the counterattack of choice by its opponents was that BAPCPA will forever end the ability of consumers to discharge debt and condemn debtors to a life of servitude.

One of the problems, at least in my experience from 2005-2008, was that consumers believed this attack, and when they consulted a bankruptcy attorney, were shocked to discover that a discharge was actually a viable option.

I wonder to what extent the drop in filings since 2005 is because people now presume that there is no point in consulting a bankruptcy attorney.

[Kenneth Neeley]

>>As I work with the data and if I come up with what I feel is a reliable data-based forecast for bankruptcy filings, it will be posted here.

Arizona saw a 17.6% drop in January 2013 compared to January 2012. So, I'm anxiously awaiting your analysis for 2013.

(By the way, I'm a former student of yours from Boyd School of Law. I now have a consumer bankruptcy practice in Phoenix.)

Credit Slips is awesome!