2016 Bankruptcy Forecast -- Let's Say 780,000

Forecasting U.S. bankruptcy filings for this year was a little more complicated. In a comment to my post about the total 2015 bankruptcy filings, Erich Fabricius made the astute observation that December 2016 saw the introduction of new bankruptcy forms and that could explain my befuddlement at the abnormally large 14.8% decline for December in terms of year-over-year daily filing rates. November, in contrast, saw almost no decline in the year-over-year rate, which is also unusual. The relatively stronger numbers in November suggests that attorneys were perhaps trying to beat the deadline before the new forms went into effect. The effect would not have to be huge -- shifting 5,000 filings from December into November would have been enough to create this effect.

What that means is my preferred mathematical model to predict bankruptcy filings for the next year has to start with the immediately previous two months being untypical months. If I run the model with the actual data, I get 800,000 filings. If I "correct" the numbers for November and December to what would have been expected had recent monthly trends continued, the model predicts 782,000 filings. The model controls for the amount of outstanding consumer credit and national personal income and has proven accurate in the past. 

A cruder estimate comes from using the data for the last six months of the previous year to predict the following calendar year. The bankruptcy filings for the last six months of 2012 and 2013 were 53.6% of the following year's filings, and the figure was 52.6% for the last months of 2014 as compared to 2015. The rate of decrease in bankruptcy filings has been slowing over the past nine months, so the ratio is likely to fall again this year. If filings in the the last six months of 2015 are 51.6% - 50.6% of the total for 2016, that will be a total of 768,000 - 783,000 for calendar year 2016.

I forecast 2016 total U.S. bankruptcy filings as 780,000. If that is right, that would only be approximately a 4.8% decline in the bankruptcy filing rate. In recent years, the rate has been falling at double digit rates -- 10% or more. Still, it is important to keep in perspective just how low the filing rate would be. My forecasted filing rate would be about 2.4 filings per 1,000 persons. You would have to go back to 1988 for the last time filing rates were that low.

Comments

[Robert White]

1.Don't most bankruptcy attorneys use software updated to the recent form to file petitions? If so then the new forms should not be an obstacle to filing unless attorneys did not upgrade.
2.If filings continue to decline then will the new forms have doen their job of helping pro se filers prepare their petition? That is, if the forms were an obstacle and now are not then shouldn't there be a reservoir of pro se filers coming forward.

[Ed Flynn]

Bob:
I think your forecast for 2016 looks pretty good. The following may help explain the Nov-Dec 2015 figures.

According to PACER data, on Monday (November 30th) a total of 7,624 bankruptcy cases were filed nationwide. This was more than double the normal daily filing volume (typically around 3,000 per day) and the highest number of filings in a single day in more than a year.
Three factors came together to cause the heavy volume of filings:
- It was the last day to file before the new bankruptcy forms went into effect;
- The last business day of every month shows elevated chapter 7 filing levels because the means test calculations are based on income received during the prior six calendar months; and
- November 30th was the last business day before “Foreclosure Tuesday” in Texas and Georgia. Chapter 13 filings spike in those two states each month on the Monday before the first Tuesday of each month.

[Bob Lawless]

Thanks to both Richard White and Ed Flynn for their comments. November was a relatively high filing month, and December was relatively low. My point was that it would not take a huge shift in filings from December to November to produce that effect, not that the shift was permanent. Ed's numbers show that a shift is exactly what happened, although only partly for the reason I speculated. Statistically, I think it was right to change -- er, "smooth" -- the numbers for November and December to make the forecast more accurate.

[John]

I think you number is low. Recent year filings have been historically among the lowest on record. This year it is much more likely to see an uptick in filings as a reversion to the mean.

[Ken]

John,

I don't think a reversion to the mean should be forecast unless the underlying metrics revert to the mean. Unless there's a good reason to think that Americans are going to shift back to their previously higher default rates and lower savings rates, with more judgments/garnishments/repossessions/foreclosures as a result, there is no reason to think filings will start moving upwards again.

[Bob Lawless]

To amplify what Ken said, we don't know what the "true" mean is. Maybe the downward slide over the past few years is regression to the mean.

[debitor]

The new forms are a mess. Fortunately due to depressed filing numbers I've been able to avoid filing with the new forms until this afternoon. All I can say is "What a mess those new forms are."

Regardless, I believe that consumer bankruptcy filings will tick up in 30-36 months as the economy sinks goes into recession in late 2017, early 2018. Filings will spike precipitously as the unemployment rate quickly rises, as it always does at the beginning of a recessions. All of this will be preceded by a bear market that persists into early 2017 followed by another sharp downturn in October of 2017 (its always October). The recession is happening in China already and in oil producing countries.

It'll take a while but those losses will work their way into here (i.e. multinationals sell less abroad, take earnings hit, then layoffs) and those job losses trickle down. There will be some foreign sovereign default or some multinational default that sets off a chain of events.

After the job losses start, it'll take 6-8 months for the credit card defaults to be charged off, longer for car deficiency judgments, and even longer for the looming disaster of loan mod redefaults to kick back into effect.

I assure you all this is already baked into the cake.

The only question that remains is if struggling consumer bankruptcy attorneys can stay afloat long enough to weather this once in a life time debt default depression. My balance sheet is strained, and so is the balance sheet of many other of my peers. We may be the ones filing bankruptcy. I can you this: for the first time in my adult life, my last six months of income has been so low that I can pass the means test for a chapter 7. Yeah, it's that bad out there for me, and for others, and anyone who says it isn't is lying.

[John]

I think it is interesting to note that filings of larger cases are already trending up, see the fourth quarter Chapter 11 distress index from DistressIndex.com. BofA's index of spreads on high-yield is similarly trending upwards.

One thing does appear certain, low interest rates are here to stay.