Bankruptcy Filings Are Still Super Low--Don't Believe the Headlines

Headlines recently appeared in the usual places about a big March jump in bankruptcy filings. It is true that March 2021 total bankruptcy filings were 43,425 (according to the Epiq Systems data) and that was a 39.1% increase from February 2021. That looks like a big jump. Of course, March is a longer month, and in fact this March had four more business days than February--almost an entire extra work week. Calculating the filing rate per business day, the March 2021 filing rate was a 14.9% increase from February 2021.

That still feels notable, but let's be careful--very careful. Bankruptcy filings are at historically low levels. When any data series hits a trough and starts creeping back to an old base rate, the increases will feel really big although we are really only getting back to what we had experienced previously. The February filing rate was 1.13 filings per 1,000 persons, the lowest since January 2006 when bankruptcy filings fell to almost nothing after the surge to beat the effective date of the 2005 bankruptcy amendments. (To give you a sense of the surge, the October 2005 rate was 25.53 filings per 1,000 persons.)

We are nowhere near getting back to pre-Covid levels of the bankruptcy filing rate. The absolute level of bankruptcy filings remains really low. The 12-month moving average for bankruptcies per 1,000 persons is 1.39. That is the lowest number in my spreadsheet that goes back to 2004. Right before the pandemic, the figure was 2.05 filings per 1,000 persons. Consider also that, year-over-year, March 2021 was a 33.9% decline from March 2020. Bankruptcies are going to have to climb about another 40% to get back to pre-Covid levels, which were already relatively low.

Predictions? There remains a huge amount of uncertainty. The easy predictions is that bankruptcies will spike as people roll off mortgage forbearance and other relief comes to an end. That may be right, but there are other scenarios that seem as equally likely. People were paying down debt earlier in the pandemic, although that trend has stopped. Also, emergency bankruptcies to stop foreclosures happen, but they don't drive the bankruptcy filing rate. And, there is the quite prosaic possibility that people just won't have enough money to pay the bankruptcy lawyer.

The biggest problem I have with predictions about what is going to happen is none of these predictions account for what happened last April when bankruptcies suddenly stopped. It was like flipping a switch. Bankruptcies dropped 40% overnight. We know that most bankruptcy filings are the result of a decision-making process that takes months if not more than a year. The decision to file bankruptcy is as much psychological and sociological as it is economic. What most likely happened is that suddenly people were not able to get to lawyers' offices to get that decision over the finish line or simply had more pressing matters. As the pandemic restrictions ease, these processes will ramp back up, and we may just end back at the base line we had.

But, I really don't know. Nobody knows. I do think an increase in the filing rate above the pre-Covid base rate is more likely than not, but there is more than the usual cone of uncertainty around this prediction. And, even if the "more likely than not" ends up being on the "likely" side of that, how much of an increase or how quickly it will occur is a complete crapshoot.

Comments

[Maureen Tighe]

I appreciate that analysis and agree that the filing rate is anyone's guess. What do you make of the increase in subprime auto loan defaults? It seems like I'm seeing more relief from stay motions on cars.

[Bob Lawless]

Interesting. I don't think subprime auto loan defaults will drive the bankruptcy filing rate, especially if the result is that people are losing their automobiles anyway after they file. Are we sure that subprime auto loan delinquencies are rising? I don't know either way. I looked for some data, and the most recent I could find was from September 2020. It was only for auto loans generally. It suggested auto loan delinquencies were down slightly during the pandemic.

[KevinR]

Mortgage forbearance is creating a backlog of delinquent payments. The last stat I saw from Jan. was around $600 billion. Mortgage mods (increasing payments or extending the term of the loan) may resolve some of this, but I'm thinking a number of consumers (especially with unemployment dropping) will consider Ch. 13 to cure the forbearance amount.

My experience is that consumers wait until an untenable bankruptcy trigger occurs such as a death, medical crisis, foreclosure, car repossession, or garnishment -- with the latter three becoming more likely once government stimulus and forbearance programs end.

But I agree that the COVID recession resulted in unprecedented financial impacts, and that the past will not necessarily be prologue as we (hopefully) exit this pandemic.

[Knute Rife]

I haven't had a chance to look, but how much of the increase was catching the raised debt limit in Sub V?

[Bob Lawless]

When one is looking at total bankruptcy filings, the subchapter V and even all the chapter 11s put together are such a small percentage that they don't move the needle at all.

[George Adkins]

Great article! You are absolutely right to say that this could be a sign of distress. Later in the year, when economy rebounds, there could be a pretty active M&A market fueled by lenders looking to sell companies they have taken big positions in. Right now, optimism surrounding vaccines, market liquidity and steps taken by retailers to get some expenses off their balance sheets could be reasons for companies holding back from filing bankruptcies.