Bankruptcy Filing Rates Not Rising, May Go Lower

The latest data from Epiq Systems shows that year-over-year bankruptcy filings dropped again in May after an increase in April. The April and May figures are particularly important because they give us two months of year-over-year comparisons with post-Covid data.

In April, there was an average of 1,860 filings per day which was an increase of 6.4% from the previous April. That uptick made me wonder whether we were beginning to see the long-predicted increase in bankruptcy filings because of the pandemic. That speculation proved premature because the May figure was 1,738 filings per day, which was not only a decrease from April but a year-over-year decline of 13.1%.

Whether the April increase or the May decrease ends up being the one-month blip is something we will learn over the next few months. It is that kind of insight you are looking for when you come to this blog--the future will reveal the future. It is much easier, however, to come up with a story that April was the anomaly than vice versa.

Bankruptcy filings are seasonal, spiking in the early spring. Ronald Mann and Katie Porter persuasively documented the reason for that is tax refunds going to pay the cost of the bankruptcy filing. Usually the effect runs from February to April with a peak in March. This year, the IRS tax filing statistics show that refunds ended up being higher overall than last year but started more slowly. There was also a third round of stimulus payments in March that capped out at lower-income levels and at levels that are more typical for bankruptcy filers. For these reasons, what we saw in April might have just been the usual annual seasonality in the filing rate, just pushed back a bit by later-filing tax filers and the stimulus money.

Focusing on the month-to-month figures obscures the big picture. As I wrote two months ago, bankruptcy filings are currently at historically low levels. To give a sense of how historically low, I put together the graph at right. The graph goes back to January 2004, when I started gathering monthly filing data. The annual seasonality in the filing date is readily apparent in the graph as filings rise and fall over each twelve-month period. To keep the y-axis at a reasonable scale, I lopped off the top of the graph for October 2005 when we saw an average of 31,520 filings per day as people rushed into bankruptcy court to beat the effective date of the 2005 law. In the months immediately after that rush, the filing rate dropped off the table, yet we are back to close to those levels.

After the 2005 trough in filings, the filing rate rose steadily in the wake of the Great Recession. Beginning in April 2010, the filing rate then began a steady decline. That decline had leveled off as shown by the 12-month moving average in the solid red line. The dashed red line hypothetically shows what the filing rate would be today without the pandemic, assuming the prior trend had continued.

"Yeah, but just wait" is a common response. There remain many predictions that bankruptcy filing rates are going to skyrocket. Those predictions began not long after the pandemic began. Not only has the spike not happened, filing rates have been down. We are living in unprecedented times, in a literal sense. Historical models do not tell us much, but there is an inescapable truth about bankruptcy filers. They have debt. When households have more debt, bankruptcy filing rates go up.

Household debt statistics give mixed signals (at best) about where bankruptcy filings might be headed. Debt levels declined in the early days of the pandemic, with commentators suggesting government aid and sometimes reduced living expenses were leading people to pay down debts. Credit card delinquencies and charge-offs have been declining and are below pre-pandemic levels. Mortgage delinquencies are falling but are above pre-pandemic levels. The easy prediction remains that everything has gone to hell, and bankruptcy filing rates will skyrocket.

I remain quite skeptical about the easy prediction. Just to get back to pre-pandemic levels, bankruptcy filings will need to increase by about 60-70% (depending on how you measure it). And, no, a return to the baseline does not count as a spike in filings. To make sure I am not misheard, none of this means there is not a lot of economic pain in a lot of households. The question here is whether that economic pain is going to show up in the bankruptcy courts. Not everyone who is financially distressed ends up in bankruptcy court.