The Second Derivative on the Bankruptcy Filings Rate

It's been a while since my last blog on bankruptcy filing rates. Indeed, the blogging has been slow for me since I got some new responsibilities in the day job. It's time that changes.

The bankruptcy filing rate continues to decline. That is bad news for bankruptcy lawyers but good news for, well, people. The second derivative, however, seems to be declining -- that is the rate of change in the rate of change is slowing, albeit barely. Instead of year-over-year declines each month of 14-15% as was happening last year, declines are now around 11-12%. Year-over-year declines the past three months have been -11.0%, -12.5%, and 11.4%.

But, declines are still declines. Overall, total U.S. bankruptcy filings look like they will be about 1,030,000 (give or take) for the 2013 calendar year, which is about what I predicted in May. That will be a 13.2% decline as compared to 2012. Although I have not done a formal analysis, the trend line suggests and short-term rises in consumer credit suggest bankruptcy filings will continue to decline well into 2014.

Bankruptcy filing rates remain historically low as well. As the chart shows, the 12-month moving average on bankruptcy filings now stand at 3.34 per 1,000 persons. Ignoring the statistical anomalous gyrations around th2 2005 bankruptcy, the last time the filing rate was that low was 1995. The filing rate has been as high as 5.67 per 1,000 persons in 2002 and peaked at 5.07 per 1,000 persons in 2010 before the present decline began.

Comments

[Jason Kilborn]

Congratulations on the Associate Dean for Research position--that's the new responsibility, right? Well deserved, and you're just the right person for that important job.

[Mike]

Thanks for this. To what do you attribute the continuing decline? Also, when do you predict that the decline will abate?

[Bob Lawless]

Historically, there are two principal effects on bankruptcy filing rates that tug in opposite directions. There is a long-term effect that bankruptcies go up as the amount of debt on household balance sheets goes up. That is not surprising. In the short-term bankruptcies go down as consumer credit rises because people can continue to borrow to stave off the day of financial reckoning. Other macroeconomic factors -- e.g., unemployment -- do not have a strong effect on bankruptcy filing rates. It's all about consumer/household debt. I am beginning to wonder whether the 2007 financial crisis has caused these historic patterns to change.

As to when the decline will end, I don't know. It would be anomalous for the filing rate to go much below 2.5 per 1,000. The trend line is down, but obviously the trend is not going to continue forever -- bankruptcy filings will not ever go to zero. I made this point in a blog post here somewhere.