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Bankruptcy Filing Rate Is Lowest Since Bankruptcy Code's Enactment--The Question Is Why

posted by Bob Lawless

2021 (Nov) Projected FilingsThere will be around 400,000 total bankruptcy filings in 2021. That figure is historically low. The table to the right shows annual filing figures since 2010, which was the post-2005 peak. The 400,000 filings this year is a 75% reduction from 2010. 

The 400,000 filings in 2021 will be a rate of 1.21 bankruptcy filing per 1,000 persons (using the mid-year, July population estimate). That is the lowest annual rate since the enactment of the Bankruptcy Code. In 1980, the first full calendar year of filings under the new law, there were 1.22 filings per 1,000 persons. In absolute numbers, there were 122,000 more filings in 2021 than in 1980, but there also are over 100 million more people living in the U.S.

Filings Per 1000.1980 to 2021Every calendar year since 1980 has had a higher bankruptcy filing rate. Absent some surprisingly high number of filings in December, this year will put an end to that. Ed Flynn's numbers over at the American Bankruptcy Institute show that at least through December 12, the situation has not changed.

Why are bankruptcy filings so low in the midst of a pandemic that has caused so much economic upheaval? Anyone who claims to have an answer to that question is either lying or overconfident. I certainly don't have an answer, but I have some hypotheses suggested by the data, with emphasis on "hypotheses." Below the fold, I explain those hypotheses and conclude with some thoughts about how much lower the filing rate can get.

Before continuing and because I suspect this post might attract a few readers who are new to the blog, let me again explain that these analyses use total bankruptcy filings. That is, the analyses lump together both individuals and corporate filings as well both personal and commercial bankruptcies. Corporate filing data are not readily available and certainly not going back historically. Although taking up a lot of the headlines about bankruptcy, corporate bankruptcies are a small fraction of total bankruptcy filing such that, even if the data were available, separating them out would not make any difference to the conclusions. As to individuals, the dividing line between the commercial and the personal bankruptcy is fuzzy in many cases. It also has changed over the years, making any commercial/personal bankruptcy data series not reliable for a historical lookback. (See here if you want the gory details.)

Why Are Bankruptcy Rates So Low?--Some Hypotheses

First, Some Global Observations

(1) Any explanation for the decline in bankruptcy filing rates has to account for the sudden decline in April 2020. The seeds of most bankruptcy filings were planted two or more years ago (see, e.g., here). Bankruptcies suddenly dropped 38% in April 2020, meaning there were likely many people who were on the verge of a bankruptcy filing but did not.

(2) We are almost two years into the pandemic. As we are reminded, today is not March 2020. The reasons for the decline in the filing rate likely have shifted over the course of the pandemic.

(3) The decline in the filing rate is huge. There are approximately half as many bankruptcies right now as we would have without the pandemic. Before the pandemic, the filing rate had leveled off and was headed slightly back upwards. There is likely not one reason for the decline but several.

(4) Filing bankruptcy is as much a sociological and psychological decision as it is an economic one. A corollary point is that bankruptcy filings are not a perfect economic indicator. A bankruptcy filing is a legal proceeding that forgives past debt. It does not create a job for the filer or put money in the bank. Bankruptcy filings have boomed in economic boom times and gone bust in economic bust times (as we are currently seeing).

The Hypotheses

(1) People Are Overwhelmed--Bankruptcy is not a high priority for someone who is spending all the energies to keep a roof over their family's head and food on the table, not to mention keeping everyone safe, arranging childcare--if it is even available--when schools are closed, and all the other problems that have come from this deadly pandemic. Even if debt problems are causing these issues, seeing the bankruptcy lawyer is further down on the to-do list than dealing with day-to-day needs. I suspect this reason was a major cause of the initial decline and has waned as the pandemic has gone on.

(2) Households Shedded Debt--One of my most insightful research findings over the years has been that people who file bankruptcy have a lot of debt. Early in the pandemic, household debt declined (see here). It has since gone back up. Bankruptcy doesn't stem from yesterday's debt but from debt incurred in the past that has gone into default and often has gone into some sort of collection process. If U.S. households paid down debt and then incurred new debt, there would be a short-term dip and a long-term rise in bankruptcy filings.

(3) Federal, State & Local Relief--The common explanation is that federal, state, and local relief eliminated the need for people to file bankruptcy. The problem is that it does not explain why bankruptcy filings suddenly plummeted before many of these programs came on board. Also, most relief payments were not large enough to stave off bankruptcy. Rather, this explanation has power to the extent relief came in the form of moratoria on court debt collections, auto repossessions, and mortgage foreclosures. These proceedings drive people into bankruptcy lawyers' offices, especially people who financially struggle for a long time to avoid a bankruptcy filing. This explanation seemed to me to be likely and powerful, but these moratoria have been ending. We would have expected filings to increase yet they have continued to decline. It is possible, especially for mortgage foreclosures, that these proceedings are just beginning to ramp up, and we will see an eventual effect in bankruptcy filing rates.

(4) People Cannot Afford a Lawyer--Bankruptcy is not cheap. During the pandemic, monthly filing rates have temporarily increased contemporaneously with federal stimulus payments. We know people use their income tax refunds to pay for a bankruptcy lawyer (see here), meaning it would not be surprising if the stimulus payments were used in a similar manner. One difficulty with this hypothesis is that it runs contrary to evidence that households have more liquid assets than just before the pandemic (see here). 

(5) Supply of Bankruptcy Services--Individuals have to demand bankruptcy services, but attorneys also have to supply those services. Early in the pandemic, it was likely that attorneys' abilities to provide services was disrupted. A lot of these services can be done electronically but not all of them. This is another explanation that almost certainly has waned as the pandemic has progressed, but I also wonder whether, as filings have been lower, attorneys who would otherwise be providing bankruptcy services have shifted their focus to other specialties.

Where Might We Be Headed

In the past, I've been able to use data on debt levels and economic growth to forecast bankruptcy filings. I can't do that now. Well, I can still run the regressions, but this analysis would necessarily use data about the past, and the current must be comparable for the analysis to have reliability. I've stopped trying to guess when filings might start going up and started wondering how much further down they can go.

We started by observing that the filing rate is at a historic low since enactment of the current bankruptcy law at 1.21 filings per 1,000 persons. Throughout the 1960s and 1970s, the filing rate vacillated between 0.8 and 1.1 filings per 1,000 person. That was under an entirely different bankruptcy law and before the modern credit economy really took off. Filing rates in the 1950s were between 0.2 and 0.6 filings per 1,000 persons, but now we are talking about before most people had any credit card in their pocket.

Given that we already close to the figures from the 1960s and 1970s, it is difficult to see where bankruptcy filings will get much lower than the current filing rate. There is room for a bit of a further decline but not by much. If we get substantially below about 366,000 filings--1.1 filings per 1,000--the words "historically unprecedented" will not go far enough.

Comments

I agree with your hypotheses with regard to the drop. As a practitioner with primary focus on bankruptcies for individuals, my takeaway is that fear is what drove lots of filings. The pattern of the not yet even in default consumer who filed bankruptcy as fast as possible after default, well before collections, have just vanished. I would estimate they were 30% or more of my practice.

It has caused me to decide to retire after 2022.

Once folks become more afraid of debt than covid, filings will return. That will take years I believe.

Dan Rylander
dan

Retirement of bankruptcy attorneys is not a minimal factor. Since the law change in 2005, fewer attorneys have ventured into the field that is fraught with traps if you are not sufficiently educated in the process. This is not just a matter of filling out forms. With an aging population of lawyers, more will retire in the near future and there is no inventory of new, younger lawyers out there to replace them.

As to relief as a factor:

Don't forget about student-loan forbearance as a major source of "relief" during the pandemic, especially for recent grad students already on an income-based repayment plan and/or working overseas (I have NO IDEA why this particular example comes to mind {vbeg}).*

Even though these are not ordinarily dischargeable in bankruptcy, they're such a significant burden on many in repayment that it doesn't take much else to drive them toward bankruptcy, directly or indirectly (via taking on more debt in the rest of their lives, often with lower credit ratings and therefore higher finance charges). Think of it as a bundle of straws removed -- at least temporarily -- from the camel's back.

Just a weird thought, but I wonder how the rise of point-of-sale loans affects the numbers?

I'd add

1) Mortgage forbearances. It's been pretty easy to get a six month forbearance for most people.

2) Ability to refinance. Property values are high, interest rates are low. Easy to your home equity to pay debts and the excess home equity prevents you from filing chapter 7.

3) Cash reserves. Low unemployment, stimulus payments, child tax credit etc., student loan and mortgage forbearances, etc. have allowed people whose salary was unaffected by the pandemic to build up cash while they're spending less going out. This is why I don't buy number 4. Pro se filings are also way down.

MD BK lawyer hit the nail on the head. The federal government has, until Jan. 1., basically halted foreclosures. Exceptions apply, but one servicer's attorney told me his clients just weren't bothering to foreclose even when they did. And the refinance boom with exploding real estate values--just downright crazy appreciation--allows people to use their homes as piggy banks. (It's like 2006 again). My chapter 13 clients are refinancing in droves to pay off plans, and those not in bankruptcy are refinancing to pay off unsecured debt. Talk to anyone who does real estate closings, and they will confirm this. So it's all getting piled on their homes with lower rates and longer loan term mortgage loans. Suddenly 50k-75k of credit card debt is now not a problem anymore. Any increase in filing will be gradual. Reasons 1 (people are overwhelmed), 4 (can't afford a lawyer), and 5 (supply of services) are just nonsense.

The #1 reason a person files bankruptcy is to stop a garnishment or foreclosure. The eviction and foreclosure moratorium combined with the extra unemployment benefits, advanced tax credits and deferred student loans have all temporarily decreased cases.

Another factor that has really affected filings over the past decade is Obamacare. I don't see lower-income debtors earning full-time wages and overtime like I did before Obamacare. Employers have reduced workers to part-time status to avoid paying health care benefits, and garnishments don't strike part-time earnings as much. In fact, something like the first 30 hours of wages at minimum wage are protected from any garnishment.

But, dark clouds are on the horizon. Inflation could really mess up this economy like the late 1970s, and you can't spend your way out of an inflation crisis. If inflation hits and the Fed raises interest rates, asset prices will fall and layoffs will follow. This could get messy.

There may be a contribution from age demographics. The large baby boom cohort is now retired or in late middle age, where I assume bankruptcy is less common. This clearly could not be the whole story, but it might add to the trend.

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  • As a public service, the University of Illinois College of Law operates Bankr-L, an e-mail list on which bankruptcy professionals can exchange information. Bankr-L is administered by one of the Credit Slips bloggers, Professor Robert M. Lawless of the University of Illinois. Although Bankr-L is a free service, membership is limited only to persons with a professional connection to the bankruptcy field (e.g., lawyer, accountant, academic, judge). To request a subscription on Bankr-L, click here to visit the page for the list and then click on the link for "Subscribe." After completing the information there, please also send an e-mail to Professor Lawless (rlawless@illinois.edu) with a short description of your professional connection to bankruptcy. A link to a URL with a professional bio or other identifying information would be great.

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