Older Americans’ Rising Bankruptcy Filings

Older Americans (age 65 and over) are increasingly likely to file bankruptcy and now comprise a larger proportion of the people who file bankruptcy -- and the effects are not small. Using data from the Consumer Bankruptcy Project, in a new working paper just posted to SSRN -- Graying of U.S. Bankruptcy: Fallout from Life in a Risk Society -- my co-authors (past Slipster Debb Thorne, Slipster Bob Lawless, and past Slipster Katie Porter) and I find a more than two-fold increase between 1991 and now in the rate at which older Americans file bankruptcy. We further find an almost five-fold increase in the percentage of older persons in the bankruptcy system. The magnitude of growth in older Americans in bankruptcy is so large that the broader trend of an aging U.S. population can explain only a small portion of the effect.

In the paper, we link older Americans’ increased filing rates with the shrinking social safety net. A story published today in the New York Times (on actual paper and on the front page!) does an exceptional job of both describing our study and detailing the ways in which the risks of aging have been off-loaded onto older Americans: “vanishing pensions, soaring medical expenses, inadequate savings.” The story also highlights the financial and life travails of a few older Americans who filed bankruptcy. Their struggles stem from declining income, lost insurance, and unmanageable medical expenses.   

Savings Plans and Chapter 13

David Jones, Chief US Bankruptcy Judge of the Southern District of Texas, has just posted a nifty empirical study of the effects of savings plans on the success of Chapter 13 filings. And, yes, part of the cool study is figuring out how to measure what counts as success in a bankruptcy filing.  The study takes advantage of a natural experiment in the Texas courts and has a bunch of fascinating findings, including about the impact of lawyers and legal culture on the choices that end up being made by the subjects of the bankruptcy proceedings.

Part of the reason I know about this study is that David was doing a graduate degree at Duke (in the judicial masters program) and I got to see the project at its inception stage in the thesis workshop that I run with Jack Knight. All of the credit goes to David though (and his wonderful advisor, John de Figueiredo) -- a fact that will be obvious to my fellow slipsters who know that I don't know squat about Chapter 13. But this is a fun study in terms of the design and findings regardless of whether you love Chapter 13 (okay, I realize that everyone else who reads this blog probably does in fact like or love Chapter 13).  It takes a basic fact about the inevitable fluctuations in expenses that almost everyone has to deal with, and tests what happens when these provision is made for these fluctuations ahead of time (versus when it is not).  Savings plans do indeed seem to make a difference; but a bunch of other factors also appear to matter - some of them quite surprising.  Clearly, as David emphasizes at the end of the paper, there is a lot here that is worthy of further investigation (and maybe legislative change).

The abstract for the draft on ssrn (that is forthcoming in the American Bankruptcy Institute's journal) reads:

This paper examines the effects of debtor savings on the viability of chapter 13 bankruptcy plans. The paper further examines the impact of lawyer culture, debtor participation in the bankruptcy process, and judicial activism in the use of the savings program by chapter 13 debtors. Using a data set of randomly selected chapter 13 bankruptcy cases filed in the Southern District of Texas, the analysis demonstrates that while savings has a direct positive impact on the success of chapter 13 plans, the degree of that success is significantly influenced by the views held by debtors' lawyers, chapter 13 trustees, and judges.

 

Please support empirical study of decision making in business insolvency

Leiden University in the Netherlands has established an impressive strength in insolvency law studies. For example, following his retirement, the eminent Bob Wessels left his massive collection of literature on the subject to a foundation, which permanently lent the collection to the school as the Bob Wessels Insolvency Law Collection. Credit Slips readers can support the efforts of Leiden researchers without parting with their libraries by simply responding to a 15-minute online questionnaire. Niek Strohmaier is a Ph.D. candidate at Leiden conducting a study on judgment and decision making within the areas of business rescue and insolvency law. As he puts it, "We offer a novel perspective on these fields by utilizing the interdisciplinary nature of our research team and by adopting a social sciences approach with empirical research methods." If there's one thing that Credit Slips can rally around, it's empirical research! So I'm hoping we can show Niek our community spirit by responding to his survey at this link (http://leidenuniv.eu.qualtrics.com/jfe/form/SV_51GewBINfBAyfzv). The survey has received a good response from the professional membership of INSOL Europe, but I hope we can supercharge this qualitative data collection with responses from North America and elsewhere, as well. Thanks for your help!

People’s Pre-Bankruptcy Struggles -- New Paper from the Consumer Bankruptcy Project

The current Consumer Bankruptcy Project (CBP)’s co-investigators (myself, Slipster Bob Lawless, and past Slipsters Katie Porter & Debb Thorne) just posted to SSRN our new article (forthcoming in Notre Dame Law Review), Life in the Sweatbox. “Sweatbox” refers to the financial sweatbox—the time before people file bankruptcy, which is when they often are on the brink of defaulting on their debts and lenders can charge high interest and fees. In the article, we focus on debtors’ descriptions of their time in the sweatbox.

Based on CBP data, we find that people are living longer in the sweatbox before filing bankruptcy than they have in the past. Two-thirds of people who file bankruptcy reported struggling with their debts for two or more years before filing. One-third of people reported struggling for more than five years, double the frequency from the CBP’s survey of people who filed bankruptcy in 2007. For those people who struggle for more than two years before filing—the “long strugglers”—we find that their time in the sweatbox is marked by persistent debt collection calls, the loss of homes and other property, and going without healthcare, food, and utilities. And although long strugglers do not file bankruptcy until long after the benefits outweigh the costs, they still report being ashamed of needing to file.

Other (Non-Religious) Non-Profit Organizations Also File Bankruptcy

Yesterday I posted about the number of religious organizations that filed chapter 11 between 2006 and 2017, and how their filings track fluctuations in consumer bankruptcy filings during those years. Non-religious non-profit organizations also file chapter 11, but in fewer numbers than religious organizations. As shown in this graph, between 2006 and 2017, a mean of 44 other non-profits filed chapter 11 per year (note: I count jointly-administered cases as one case).

 In comparison, a mean of 79 religious organizations filed chapter 11 per year between 2006 and 2017. Over these twelve years, 36% of all chapter 11 cases filed by non-profit organizations were filed by non-religious non-profits.

Churches Are Still Filing Bankruptcy

Not only are religious organizations still filing under chapter 11. As in prior years, they continue to file under chapter 11 in line with fluctuations in consumer bankruptcy filings. Find a couple graphs below to show this. But first, some background.

In my prior work, I analyzed all the chapter 11 cases filed by religious organizations from the beginning of 2006 through the end of 2013. (I define any organization with operations primarily motivated by faith-based principles as religious.) I found that these chapter 11 cases were filed predominately by small, non-denominational Christian churches, which mainly were black churches (80% of more of their members are black). And, also, that the timing of the filings tracked consumer bankruptcy cases (chapters 7, 11, and 13), not business bankruptcy filings, but lagged by one year. That is, if consumer bankruptcy filings decreased in a given year, religious organizations' chapter 11 filings decreased in the next year. I linked this result to how religious organizations' leaders came to think about using bankruptcy to deal with their organizations' financial problems.

Since my original data collection, four years has passed. I thus recently identified all the religious organizations that filed under chapter 11 between the beginning of 2014 through the end of 2017. During these four years, religious organizations continued to file, but in smaller numbers per year, as shown in this graph (note: I count jointly-administered cases as one case).

Audio Recordings of Bankruptcy Court: News from Delaware

Several Credit Slips posts from earlier this year (here and here) focused on the virtues of courts releasing digital audio recordings of hearings, and specified the Judicial Conference authority for doing so. Over the summer, I found about three dozen bankruptcy courts for which at least one audio recording had been posted on a court docket in the prior year, albeit with significant variation in frequency of posting. 

It is great to be able to report that the U.S. Bankruptcy Court for the District of Delaware has joined the group of bankruptcy courts using this technology  (announcement here with the details). Proceedings before Judge Carey are the first to be posted, with other judges' hearings potentially to follow. 

 

 

Bankruptcy, Illness, and Injury: More Data

A while back, political scientist Mirya Holman and I wrote a book chapter making sense of existing (and dueling) studies of the relationship between medical problems and bankruptcy, and presenting new findings from the 2007 Consumer Bankruptcy Project on debtors who entered into payment plans with their medical providers and fringe and informal borrowing for medical bills. Given the enduring interest in household management of out-of-pocket expenses associated with illness and injury, we recently posted an unformatted version of the chapter so it can be useful to more researchers and advocates.  Download it here.

ProPublica: The Bankruptcy System Fails Black Americans

It's been a busy day, but before I sign off for the evening, I would be remiss not to flag Paul Kiel's outstanding piece that came out this morning, How the Bankruptcy System is Failing Black Americans. ProPublica and The Atlantic co-published the article. An extensive data analysis also accompanies the article. Anyone who follows Credit Slips will want to read these pieces.

Kiel finds chapter 13 filings are about three times higher in predominately black zip codes as compared to predominately white zip codes. Of course, these findings very much parallel our earlier work, which I blogged about here back in 2012. Like our work, the disparities Kiel finds remain even after statistically controlling for financial and other variables that should determine chapter choice. Because chapter 13 is generally a more expensive choice than a chapter 7, requiring a payment plan that many debtors don't complete (and hence don't receive a discharge), the racial differences are troubling.

Where Kiel's article really shines are the interviews with the attorneys and bankruptcy debtors in Memphis, Tennessee. The interviews put faces and stories to the statistics that we can't do in academic studies. Check out Kiel's work.

An Explanation for the Low Bankruptcy Rates: Debt

Yesterday, I noted the U.S. bankruptcy filing rate of 2.38 per 1,000 persons is at historic lows. The next question is always why. In this post, I am going to try to walk through an explanation in four graphs. The upshot is that consumer debt is low but rising. As I like to say, it takes years of study to come to the conclusion that people file bankruptcy because they are in debt. This is not to say that other factors are not contributors -- unemployment, general economic conditions -- but the primary macroeconomic driver of bankruptcy filings is the amount of debt on household balance sheets.

Bankruptcy Filings Holding Steady for the First Half of 2017

Using data from Epiq Systems, we appear to be on track for 774,000 bankruptcy filings for the 2017 calendar year. That would basically be the same rate of filings as in 2016 when total filings were just under 772,000. This calculation comes from a simple extrapolation. There were just under 400,000 bankruptcy filings for the first six months of this year. To get an estimate of what filings will be for the entire year, we cannot simply double the six-month figure because bankruptcy filings tend to be higher in the first part of a year. In the past two years, the first six calendar months have seen 51.6% of the total filings for the year. Thus, just under 400,000 filings for the first six months of a calendar year would imply about 774,000 filings for the entire year.

New Article from the Consumer Bankruptcy Project: Attorneys’ Fees and Chapter Choice

Many of us on Credit Slips have been part of the Consumer Bankruptcy Project (CBP), a long-term research project studying people who file chapter 7 and 13 bankruptcy. Several years ago, some of us blogged about the writings from the last CBP iteration in 2007.  In 2013, the CBP was relaunched as an ongoing data collection effort. The CBP’s current co-investigators – myself, Bob Lawless, Katie Porter, and Debb Thorne – recently posted “No Money Down” Bankruptcy, the first article analyzing data from the Current CBP (data from 2013-2015), combined with 2007 CPB data. The article focuses on the timing of when debtors are required to pay their bankruptcy attorneys to report on the increasingly prevalent phenomenon of debtors paying nothing in attorneys’ fees before filing chapter 13.

This nationwide phenomenon raises questions about how people are accessing bankruptcy and the extent of the benefits they receive from the system. The phenomenon also explains some prior findings about the intersection of race and bankruptcy filings. And it adds to our knowledge about regional disparities in the percentage of people who file chapter 7 versus chapter 13 bankruptcies.

Everything You Wanted to Know About Bond Workouts But Were Afraid to Ask

There's a great new paper available on out-of-court restructuring and the Trust Indenture Act.   The New Bond Workouts is up on SSRN.  From the abstract it sounds pretty darn amazing—a new, empirically based analysis of bond restructurings that rediscovers a long-forgotten intercreditor duty of good faith: 

What's Wrong with the Bankruptcy Courts?

The Judiciary Data and Analysis Office of the Administrative Office of the US Courts has launched a new feature called "Just the Facts," highlighting statistical trends in the US judiciary. Table 2 and Chart 3 of the inaugural report reflect a curious spike in the appellate reversal rate in bankruptcy cases in 2015. While the reversal rate for both ordinary civil cases and bankruptcy cases in the Courts of Appeals had hovered steadily around 10-12% from 2011 to 2014, the reversal rate in bankruptcy cases suddenly shot up to double that, 24% (!), in 2015. It is not entirely clear to me whether this is reversal of the Bankruptcy Courts' rulings or the District Courts' rulings (it may be a bit of both, taking into account direct appeals, etc.), but in either case, whoa! Anyone have any idea what happened here? Why did the appellate courts get so mad at the lower courts in bankruptcy cases all of a sudden the year before last? I wonder if this continued in 2016. Lots of Stern reversals? Something else? Curious.

UPDATE 1/31/17: Bankruptcy statistics guru, Ed Flynn (whose fabulous work you've probably seen in the ABI Journal), helped me to understand that (1) the statistics referenced here (from Tables B-1 and B-5)  are for appeals from District Courts to Courts of Appeals, as BAP cases and District Court bankruptcy appeals are reported elsewhere (Tables BAP-1 and -2 and C-7, none of which indicates the numbers of reversals at these intermediate appeal levels), (2) the 110 merits reversals in 2015 come predominantly from the 11th Circuit and involve mostly one appellant, (3) we can probably now guess who it was and therefore what happened: Bank of America's appeals of wholly underwater second mortgage stripdown in Ch. 7  had to be granted (lower courts reversed) after the Supreme Court reversed the aberrant 11th Circuit position on allowing such stripdowns in Caulkett in mid-2015. Mystery most likely solved. Thanks, Ed!

Bankruptcy Filings for 2017 -- Let's Say 767,000

According to Epiq Systems, there were 771, 894 total U.S. bankruptcy filings in 2016, a decline of 5.8% from 2015. The overall annual decline in 2015 was 10.0% and was 11.8% in 2014.  As I noted yesterday, the rate of decrease is decreasing.

At the beginning of 2016, I projected 780,000 filings for the year. That forecast was only 1.0% off. Pride goeth before a fall. Here is my thinking for 2017.

Bankruptcy Rate Rises in December . . . A Blip and Not a Blip

Something happened in the U.S. bankruptcy courts that had not happened since October 2010. The daily filing rate increased on a year-over-year basis. There were 56,394 filings in December 2016 as compared to 53,844 in the previous December. Also, because the 2016 filings were spread over one less business day than in 2015, the rise represented a 9.7% increase in the daily filing rate. The lighter-red line in the graph to right the shows just how dramatic the spike was.

Civil Rights and Economic Justice in a New Era

Sharing news of this post-election civil rights conference on December 2, 2016 that, notably for Credit Slips, features pathbreaking research by Professors Mechele Dickerson and Bob Lawless (in collaboration with Dov Cohen and the late Jean Braucher) on the intersection of race with debt and bankruptcy and an exploration of how this research informs policymaking and advocacy going forward. Time permitting, I will address a different intersection between race and debt: collecting judgments arising from police misconduct when cities file for bankruptcy. Thanks to Professor Ted Shaw and the Center for Civil Rights for recognizing the role debtor-creditor research can play in the quest for equality. 

Register using this link.

 

Annual U.S. Bankruptcy Filings on Track for 6.7% Decline

It has been a while since I last checked in on bankruptcy filing rates. The arrival of the latest figures from Epiq Systems was a welcome reminder to do so.

We are at the halfway point for the year, and the U.S. has had 398,000 bankruptcy filings. It is tempting to simply double that figure to get an estimate of what filings will total for all of 2016, but that estimate would be too high. Bankruptcy filings are somewhat more concentrated in the first six months of the calendar, which have accounted for about 52% of yearly filings for the past two years. Extrapolating from recent experience would mean there will be 764,000 filings for the calendar year.

That would be a 6.7% decline in filings from 2015. Back in January, I forecasted a 5% decline or 780,000 filings for 2016. Given that we are well within the confidence interval of that estimate, I will take that. Although we still have half the year left to go, the model I use for the forecasting looks to be holding up.

In terms of trends, we have had 68 straight months of year-over-year declines in the daily filing rate. The annualized filing rate per 1,000 currently stands at 2.46. The graph shows a 12-month moving average for filings per 1,000 persons since 2008. The discerning eye will note the tail of the graph is flattening. The year-over-year decline is slowing. Where we saw double-digit declines in 2013-14, the declines are in the 5%-8% figures now.

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. 

Bankruptcy Filings Drop 10% in 2015

According to the latest figures from Epiq Systems, total U.S. bankruptcy filings dropped 10% in 2015. The yearly total was 819,240 compared to 910,090 the previous year. As bankruptcy experts know, these figures are low. In 2015, there were 2.55 bankruptcy petitions per 1,000 persons, the lowest figure since 1989, ignoring the statistical gyrations around the 2005 bankruptcy law. If the decline keeps up, we won't even have to ignore the 2005-06 statistical gyrations for the statement to be true.

Last January, when forecasting the number of 2015 filings, I wrote, "a good estimate for 2015 bankruptcy filings is 800,000." That turned out to be not too bad of a forecast, off by only 2,5%. As the model I used seems to have been a good prediction, I will try it again and post the results here on Credit Slips.

Before I go off to crunch numbers, one other thing caught my eye in the latest numbers. The daily filing rate for December was only 2,446, which was a year-over-year decline of 14.8%. The decline in U.S. bankruptcy filings had been slowing, and I was expecting the decline to eventually flatten out. December is an unusually slow month for bankruptcy filings, but it is an unusually slow month every year. I am always cautious about extrapolating too much from one month of data, but the size of the decline in December took me by surprise. 

Servicers Serve the Interests of the Lender, NOT the Student Loan Borrower

I have enormous respect and appreciation for the CFPB and the wonderful and talented and committed folks who work there. Thus I am mystified that in their efforts to improve servicing of student loans and directing of student loan at-risk borrowers to the window that would help them, they continue to misunderstand the basic nature of capitalism and its profit motive and the borrower-lender relationship. Certainly, the fatally flawed structuring of the credit counseling industry by the credit card lenders in the 1970’s and the still ongoing dismal efforts of mortgage loan servicers to “help” borrowers in default should have taught us the lessons that those who serve the lender cannot and may not and will not serve the interests of the borrower. Capitalism does not work that way whether the lender is a traditional profit incented financial institution in the case of credit card and mortgage loans or a mix of private and public lenders as in the case of student loans. Think IRS and SBA for other government collector examples. If the notion of inclusive capitalism or Robert Reich’s notion of saved capitalism takes hold, perhaps it will invent a way for this to work, but today such efforts are poisonous because they delay creative solutions and punish borrowers and the American economy both of which desperately need such solutions to thrive. Of course servicing must be improved as much as possible and it is tempting to try to rely on the servicers since they are the ones with contacts with the borrowers, but servicers are collectors by another name. It is well past time to stop putting our faith in the collectors. There is currently no high quality network of financial counselors who can help student loan borrowers at risk.All of us including the Department of Education and the CFPB need to start work immediately to develop that effective network and make certain that this crucial job is not delegated to mediocre providers without sufficient quality or quality controls. More on that in a later post.

Who "Presides" over Chapter 13 Plan Confirmation Hearings?

Temple Law Review will soon publish a volume honoring Bill Whitford, based on a conference from last fall. That event was particularly special for an additional reason: it turned out to be the last opportunity, for many of us, to spend time with another inspiring leader in our field, Jean Braucher. 

My own short contribution, on judicial oversight in chapter 13 bankruptcies, has just been posted here. We will share the word when the entire volume is available - including, I believe, a piece from Jean.

Gavel image courtesy of Shutterstock

Municipal Bankruptcy After Detroit

A new commentary stemming from my draft article Federalism Form and Function in the Detroit Bankruptcy is now posted on the Columbia Law School Blue Sky Blog. The post frames the current skirmishes over other municipalities' access to chapter 9 at least in part as a referendum on the procedural tools used by the court to supervise the Detroit bankruptcy. For two prior Credit Slips posts on the article, see here and here.

Arrow image courtesy of Shutterstock.com

Yep, 800,000 Bankruptcy Filings This Year

My blogging has been light the past few months as we have been working on the eighth edition of what will now be LoPucki, Warren & Lawless, Secured Transactions: A Systems Approach. For you secured transactions teachers out there, we have returned a first set of page proofs and everything looks on track for publication later this year well in advance of the spring semester.

To get back into the blogging swing of things, I go to where else . . . bankruptcy filing data. Back in January, I predicted that total 2015 bankruptcy filings for the U.S. would be "somewhere around 800,000." Revisiting that prediction, the numbers seem right on track to meet it.

Quantifying the Benefits of the Fresh Start

I recently discovered a not-so-new paper that provides a useful answer to a question I've asked before:  Who benefits from consumer bankruptcy, and to what degree? This is a real challenge for policy-making, and well-supported answers are essential to greasing the wheels of reform.

In this paper, Will Dobbie (Princeton) and Jae Song (SSA) use a creative technique, comparing the financial outcomes of Chapter 13 debtors whose plans were--and were not--confirmed to probe the positive effects of access to such relief (apparently whether or not the payment plan is successfully completed). Successful access to Chapter 13 protection led to over $5000 in increased annual earnings in the first ten post-filing years and a 3.5 percentage-point increase in employment over the first five post-filing years, including a nearly 3 percentage-point increase in self employment. Access to relief also reduced the receipt of "welfare" benefits and increased retirement savings contributions.  Most striking, access to debt relief reduced mortality (presumably by decreasing stress) during this period by almost 2 percentage points--which is a 47.5% decrease from the mean for filers whose cases were dismissed, largely attributable to a large, positive effect on filers over 60. The authors attribute these gains to an increased incentive to work and produce earnings and  reduction in economic instability and stress.

The results of this study are among the many individual and societal benefits of consumer bankruptcy commonly identified in legal literature. Indeed, the authors conclude that "individual debt relief is much more likely to be welfare-improving than previously realized"--and these instances of individual welfare redound in direct ways to the state and society as a whole. While I can see a variety of quibbles that empirical scholars might have with this study, the results provide fairly solid support for the most common working theories of relief, and they offer even greater comfort for policymakers searching for reasons to introduce or expand individual debt relief.

Bankruptcy Filings Down Again 10.1% in February 2015

Thanks to Epiq Systems, the latest monthly bankruptcy figures are out, and they show a 10.1% year-over-year decline. We now have had 52 straight months of year-over-year declines in the U.S. bankruptcy filing rate. The graph to the right shows the trend in year-over-year changes.

There was a daily average of 3,422 bankruptcy filings in February, compared to 3,804 from the previous year. Total February bankruptcy filings were just over 65,000. (Daily averages are computed based on business days.)

I forecasted approximately 800,000 bankruptcy filings for the 2015 calendar year, and the first two months of the calendar year suggested we are spot on that forecast. The first few months of the calendar historically see the highest filing rates of the year. January and February usually account for about 15.5% of the annual total, and extrapolating that historical pattern to the 124,052 filings so far in 2015 puts us right at 800.000 for the calendar year.

(For new readers, reasons for the decline are explained in many of my posts collected here.)

Sh*t In, Sh*t Out? the Problem of Mortgage Data Corruption & Empirical Analysis

Empirical economic analysis is a powerful tool. It can elucidate correlations and sometimes even get us to causual explanations. But it has a serious weak-spot:  its value is entirely dependent upon the integrity of the data analyzed. To put the problem succinctly: sh*t in, sh*t out.

This brings us to analyses of the housing bubble. There's a sizeable academic literature on the housing bubble (and relatedly also expert witness reports on loss causation in MBS litigation) that rely on loan-level data. The problem is that a lot of that loan-level data is suspect. That should hardly be a surprise: the industry even referred to some products as "liar loans". And there were also FBI Mortgage Fraud reports indicating an uptick in mortgage fraud. But it was easy for economists to ignore the data integrity problem as long as the problems were merely anecdotal (e.g., the mariachi musician with the six-figure income), and could be blissfully assumed to only affect a small number of loans.

No longer. It's hard to show mortgage fraud empirically, but there's a growing empirical literature about mortgage fraud. There are now a couple of academic studies demonstrating significant inflation of borrower income on loan applications (here and here and here and here and here). (To be clear, this does not mean that the income was inflated by the borrowers. It could be inflated by either borrowers or lenders, including loan brokers.) There's also a Fitch Ratings report from late 2007 that shows questionable stated income, employment, FICO scores, property occupancy status, and appraisals on a large percentage of a small sample of subprime loans. 

I want to emphasize that this literature does not undermine all empirical work on the housing market during the bubble years. But it should give us pause when considering any analysis that relies on either loan-level or pool-level loan characteristics such as income, DTI, FICO, occupancy status, and LTV/CLTV. I suspect that the empirical mortgage fraud literature will not deter many economists from plowing ahead whenever their data produces a regression with statistical significance. And the studies might well be right in the end. But it should tell the rest of us to consume the studies with a grain of salt.

Rethinking “Small” Business Bankruptcies

It may surprise some, but approximately 90% of all chapter 11 debtors have less than $10 million in assets or liabilities, less than $10 million in annual revenues, and 50 or fewer employees (see data on small and medium-sized enterprises (SMEs) in the ABI Commission Report, here). These companies are the heart of chapter 11. Nevertheless, most of the media and caselaw coverage discusses only the megacases—e.g., Caesars, American Airlines, Tribune Company, etc.—representing approximately 2-3% of chapter 11 debtors. It is time to change the focus of the conversation.

When a small business closes its doors, an entire community feels the impact. Consider the following description of the ripple effects of the closing of a small mine in Lincoln County, Montana:

In addition to the workers and families directly impacted by the loss of jobs, the ripple effects of the loss of that income will impact local businesses at every level. Restaurants, stores and other shops depend upon local consumers to keep themselves afloat, the dollars that are paid to those employees find their way into the hands of a number of additional places, keeping a small local economy alive.  (Full story here.)

Similar stories occur most everyday in towns across America (see, e.g., here).

Have Retail Reorgs Gone the Way of the Dodo?

In the past two months, four retailers have filed bankruptcy cases. RadioShack is rumored to be preparing a chapter 11 filing, and other retailers certainly appear to be struggling (see Stephen Lubben’s post here). But if you were counseling any of these retailers, would you recommend a chapter 11 filing? Okay, put aside the professional fees you might earn—would filing really be in the best interests of your retail client? (For a discussion of fees and costs in chapter 11, see Part IV.A.8 of the ABI Commission Report.)

Consider this: from 2006-2013, the number of retailers liquidating in chapter 11 increased significantly. Although no data are perfect, the various data we have on chapter 11 filings are quite telling. For example, according to the UCLA-LoPucki Bankruptcy Research database, during 2006-2013, 41.2% of large public retailers (excluding eating and drinking places) emerged from chapter 11 and 58.8% liquidated while, during 1980-2005, 60.5% of large public retailers emerged from chapter 11 and only 39.5% liquidated. Likewise, a quick look at the New Generations Public and Major Private Companies database suggests a similar trend for 2006-2013: approximately 62% of retail cases in the database ended in a liquidation (36 of 58). A chapter 11 filing has, quite literally, become a “bet the company” decision for retailers.

Bankruptcies Down 12% in 2014, Forecast Predicts the Same Decline for 2015

The final count for 2014 U.S. bankruptcy filings is in, thanks to the data from the ever-helpful Epiq Systems. There was a total of 910,090 total bankruptcies in 2014, a decline of 11.8% from the previous year.

In early June, my prediction was for 2014 bankruptcies to be "just over 900,000," a solid prediction but with half the data already in the books.

My prediction for 2015 bankruptcies is somewhere around 800,000, which would be another decline of 12%. I arrived at that figure in two ways.

Bankruptcy Filings Are Low, But Not Everywhere

Bankruptcy filings have dipped to their lowest rate since 1990, as previously blogged (ignoring anomalous statistical gyrations around the 2005 changes to the bankruptcy law). Over the past twelve months the bankruptcy filing rate per 1,000 persons has been 2.95, which is the first time it has been below 3.0 in almost 25 years. But, the filing rate is not that low everywhere.

Before discussing how the filing rates are different across the country, the usual question I get is why the bankruptcy filing rate has declined so much. The answer to that question is not this post. Rather, see many previous posts like here and here. The short version is that U.S. households are carrying less debt -- nothing more complicated than that. Along those lines see the post at Calculated Risk about the Fed's household debt service ratio being near record lows.

Bankruptcy Filings Will Be the Lowest Since 1995 -- Here Is a Reason Why

In June, I said we are on track for just over 900,000 bankruptcy filings for 2014. The latest data are in from Epiq Systems, and that 900,000 figure remains the best estimate for the calendar year. We have had 556,875 total bankruptcy filings this year, and in 2012 and 2013, the last five months added 39.5% more filings. That gives an estimate of abut 907,000 filings for 2014.

Year-over-year declines remain large. There were 77,489 total bankruptcy filings in July or 3,521 filings per business day, a 11.7% decline from the previous year.

As the chart shows, the number of bankruptcy filings will be the lowest in the last seventeen years -- indeed the lowest since 1995. Those of you paying attention at home might point out that 2006 and 2007 appear to be lower, but these were the years around the passage of the 2005 bankruptcy amendments. If we average 2005 - 2007 for a more accurate picture, there were 1.1 million filings per year.

"Don't give me so much that you've given me nothing" - Remembering M. Caldwell Butler's Contribution to Bankruptcy Law

Former Virginia Congressman M. Caldwell Butler died last week. He is widely known for his role in the Nixon impeachment proceedings, his efforts to limit extensions of the Voting Rights Act, and his support for ensuring legal representation for low-income individuals. But Congressman Butler is also a major figure in the history of bankruptcy law. He was a principal co-sponsor of the Bankruptcy Reform Act of 1978 that serves as the foundation of the modern bankruptcy system. Professor and lawyer Kenneth N. Klee worked closely with Congressman Butler on the House Judiciary Committee in the 1970s. I asked Professor Klee to share a few words of remembrance with us, which I repeat in their entirety here:

I first met M. Caldwell Butler in 1975 when he became the Ranking Minority Member of the Subcommittee on Civil and Constitutional Rights of the House Judiciary Committee. Caldwell was most interested in the Voting Rights Act legislation and finding a way for the South to get out from under the Act. In his view, Washington was improperly interfering with the sovereignty of the southern states based on predicate acts that had long since ceased to serve as a basis for federal control. He asked me to draft a series of amendments that would permit the South to extricate itself from the Voting Rights Act. The requirements to regain sovereignty were quite demanding, to the point that the amendments became known as the "impossible bailout."  Nevertheless, the amendments did not come close to passing. It was evident that there were no circumstances under which the majority in Congress wanted to let the southern states out from the Voting Rights Act.

Caldwell assumed his responsibilities over bankruptcy legislation with diligence and good cheer. His fabulous sense of humor carried us through many long markup sessions during which the members of the Subcommittee read the bankruptcy legislation line by line. He had a sharp legal mind and deep curiosity. He also was very practical and to the point. He was fond of telling me "don't give me so much that you've given me nothing."

It was a privilege and honor to work with him. The bankruptcy community should join in paying him tribute.

                        -- Ken Klee

Congressman Butler made another round of contributions to bankruptcy reform in the 1990s. The fact that they are not all reflected in today's Bankruptcy Code makes this story more pressing, not less. Well over a decade after he had returned to the practice of law in Virginia, Congressman Butler was appointed to the National Bankruptcy Review Commission, for which I was a staff attorney. Expressing satisfaction with the 1978 Code, the House Judiciary Committee directed this Bankruptcy Commission to focus, for two years, on "reviewing, improving, and updating the Code in ways which do not disturb the fundamental tenets of current law."  Not one to leave the heavy lifting to others, even in a pro bono post, Congressman Butler stepped up to the challenge of forging a compromise, among those with diverging politics and views, to improve the consumer bankruptcy system.

900,000 Bankruptcy Filings This Year, Maybe

Bankruptcy filings have continued to decline in the first part of 2014. This decline is part of a longer-term trend as the graph shows. (Clicking on the graph will bring up a larger version in a pop-up box.)  As always, thank you to Epiq Systems for providing the data.

The May 2014 daily bankruptcy filing rate was 4,079, which was a 7.0% decline on a year-over-year basis. There have been just over 405,500 in the first five months of 2014. For the past three years, filings for the first January - May have been approximately 44.5% of the yearly total. Extrapolating, we therefore can expect just over 900,000 bankruptcies for the entire calendar year.

The annual filing rate is now 3.08 bankruptcies per 1,000 persons. The last time bankruptcy filings were this low was 1990. (if we ignore the anomalous statistical gyrations around the 2005 bankruptcy law).

With these latest numbers, the year-over-year bankruptcy filing rate has declined for forty-three straight months. The only indication this decline might stop is that the May 2014 year-over-year decline of 7.0% was the smallest decline since April 2011 when the decline was also 7.0%.

Working and Living in the Shadow of Economic Fragility

Credit Slips readers, please note the publication of a new book edited by Marion Crain and Michael Sherraden. The New America Foundation is hosting an event on the book tomorrow, Wednesday, May 28, 2014 at 12:15 EST. Not in Washington, D.C.? The event will be webcast live. 

The book project developed out of a stimulating multi-disciplinary conference at Washington University in St. Louis. Participants had great interest in considering how bankruptcy scholarship fits within the larger universe of research on financial insecurity and inequality. My chapter with Mirya Holman synthesizes the literature on medical problems among bankruptcy filers and presents new results from the 2007 Consumer Bankruptcy Project on coping mechanisms for medical bills, looking more closely at the one in four respondents who reported accepting a payment plan from a medical provider. Not surprisingly, these filers are far more likely than most others to bring identifiable medical debt, and therefore their medical providers, into their bankruptcy cases. We examine how payment plan users employ strategies - including but not limited to fringe and informal borrowing - to manage financial distress before resorting to bankruptcy, and (quite briefly) speculate on the future of medical-related financial distress in an Affordable Care Act world.

Cui bono?

At a conference on consumer bankruptcy policy over the weekend in Athens, Greece (a place that knows all too well about consumer financial distress) and again today in class, I confronted a really nagging, fundamental problem of bankruptcy policy: For whose benefit do modern societies develop consumer bankruptcy laws, and do these systems actually deliver such benefits? In my view, the most convincing and common explanation for why existing systems offer debt relief to consumers is that relieving their suffering redounds to the greater benefit of society at large (see, e.g., section I.9, pp. 26-40, in the World Bank's Report). The problem is that I know of no empirical proof of this essential assertion. Indeed, to the contrary, I have seen well done empirical evaluations of the fresh start that suggest that, at least in the US bankruptcy system, many consumer debtors are not being reinvigorated and reintroduced into the productive, open-credit society.

I'm no empiricist, but it strikes me as potentially impossible to substantiate the premise of consumer bankruptcy policy empirically. It would be a monumental task to even formulate a research agenda for such a question. How would/could anyone ever prove that society benefits from relieving consumers of overburdening debts? Has anyone tried? Am I missing something I should be citing? Is anyone attempting to answer the question today? Any leads welcome.

Are Churches Slowly Recovering?

I'm thrilled to join Credit Slips as an occasional contributor. As Bob mentioned, my research focuses on religious organizations that file under chapter 11. Based on the approximately 500 religious institutions that filed between 2006 and 2011 (about 90 cases per year), I previously concluded that primarily small nondenominational and congregationalist Christian churches seek to reorganize in hopes of retaining their buildings after they have fallen behind on mortgage payments. I recently updated my database of religious organization chapter 11 cases through the end of 2013 to see if faith-based institutions filed in similar numbers over the past couple years. (My previous paper details how I identify these filings.)

This graph shows the number of religious organization chapter 11 cases filed per year (values on left axis) versus the total business chapter 11 filings per year (values on right axis) based on data from Epiq Systems. Religious organizations are still filing in what some might view as substantial numbers: 107 cases were filed in 2012 and 89 cases were filed in 2013. Similar to total chapter 11 filings, their filing numbers are declining. On average, religious organization cases still account for about 1% of chapter 11 filings every year. 

Bankruptcy Filings Fall 13% in 2013

The year-end bankruptcy data from Epiq Systems just became available. Total bankruptcy filings in 2013 were 1,032,326, a 13% decline from the previous year. (Note the precise total will be subject to minor final adjustments.)

On a monthly basis, the daily filing rate in December was down 16.3% on a year-over-year basis. The monthly decline continues a long-term trend of falling bankruptcy filing rates. Filings are currently running around 3.3 per 1,000 persons. Last year at this time, it was 3.8 per 1,000 persons as compared to a post-2005 high of 5.0 bankruptcy filings per 1,000 persons, which occurred in September 2010.

Once December consumer credit statistics and recent economic indicators become available, I will try to make a forecast of where bankruptcy filings might be heading. This year, I predicted between 1,019,000 and 1,100,000, although that was in a May posting with four months of data available so I was cheating a little. Still, I take it as a predication.

(Yet Another) Chapter 13 Map

This post will have to be short on commentary -- "yay!," goes the reader -- as I am in the middle of getting ready for a conference. One of the things that preparation entailed is putting together the map to the right. To see the map well, you will need to click on it and a bring up a full-size image in a pop-up box.

The map shows the percentage of all 2013 bankruptcy cases that were chapter 13s in the 90 federal judicial districts in the fifty states and the District of Columbia. Over the years, I have put up numerous maps and tables about chapter 13 rates. This map shows the same patterns we have seen in the past in terms of both the range of variation and geographic concentrations of high chapter 13 districts. This version is different because it (a) uses 2013 data (through November) and (b) has groupings based on a cluster analysis. (A cluster analysis finds "natural" groupings of data based on the data's statistical properties.)

If anyone else has a use for the map, feel welcome. All I ask is attribution back to this post.

As Bankruptcy Filings Fall, the Percentage of Chapter 13s Rises

The latest bankruptcy filing statistics from Epiq Systems have just been released. They show that U.S. bankruptcy filings in November were just over 3,700 per business day. That is a 15.0% decrease on a year-over-year basis from last November. With just one month left in the calendar year, it looks like 2013 will see a total of around 1,030,000 total bankruptcy filings, representing a 13.1% decline in bankruptcy filings as compared to 2012.

My posts on the bankruptcy filing rate inevitably lead to questions about the reasons for the decline. If you are new to the blog, you can find many old posts discussing the reasons for the decline on our bankruptcy data page. I will try to write more about the patterns and trends I see in the bankruptcy filing rate decline after the first of the year when the full year's worth of data is in. 

Until then, it seemed useful to note that the percentage of bankruptcy cases that are chapter 13s has been increasing ever since the bankruptcy filing rate started declining in 2011. In an earlier post, I noted that the decline in the filing rate seems to be less in judicial districts where chapter 13 rates are high. A similar dynamic appears to be present in the annual data. Chapter 7 filings seem to have greater variation than chapter 13 filings, although it is fair to say the effect is not of a huge magnitude. 

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%.

New Empirical Paper on Home Mortgage Foreclosure and Bankruptcy

Cross-campus colleagues and I have posted a paper that studies intersections between mortgage foreclosure, chapters of bankruptcy, and other variables, using the Center for Community Capital's unique panel dataset of lower-income homeowners. An excerpt from the abstract:

We analyze 4,280 lower-income homeowners in the United States who were more than 90 days late paying their 30-year fixed-rate mortgages. Two dozen organizations serviced these mortgages and initiated foreclosure between 2003 and 2012. We identify wide variation between mortgage servicers in their likelihood of bringing the property to auction. We also show that when homeowners in foreclosure filed for bankruptcy, foreclosure auctions were 70% less likely. Chapters 7 and 13 both reduce the hazard of auction, but the effect is five times greater for Chapter 13, which contains enhanced tools to preserve homeownership. Bankruptcy’s effects are strongest in states that permit power-of-sale foreclosure or withdraw homeowners’ right-of-redemption at the time of auction.

Bear in mind that most homeowners in foreclosure in this sample did not file for bankruptcy. Among the 8% or so who did, the majority filed chapter 13. For even more context, please read the paper - brevity is among its virtues, and exhibits take credit for page length. A later version will ultimately appear in Housing Policy Debate.

Ribbon house image courtesy of Shutterstock.

Bankruptcy Filing Rate Decline Is Historically Anomalous

The latest bankruptcy filing figures from Epiq Systems show that the daily filing rate declined again in June 2013 by 11.5% on a year-over-year basis. There were 83,580 total bankruptcy filings in the month for a daily filing rate of 4,179 spread over the 20 business days in June. 

In the 2013 calendar year, there have been over 544,000 bankruptcy filings. For the past two years, bankruptcy filings for the first six months have been 53% of the total filings for the calendar year. A simple extrapolation thus suggests there will be approximately 1,020,000 bankruptcy filings in the 2013 calendar year. 

I updated the chart to the right, which has appeared on this blog in the past. (A mouse click on the chart will bring up a larger version in a pop-up window.) The chart shows the daily bankruptcy filing rate since 2004, making adjustments for the population growth that has occurred over that time. As the chart demonstrates, there has been a steady decline in the bankruptcy filing rate since early 2010.

May 2013 Bankruptcy Filing Numbers Continue Trend

The latest data from Epiq Systems are available, and they confirm my estimate last month of just over 1.0 million bankruptcy filings for the 2013 calendar year. Epiq Systems reports 96,430 bankruptcy filings for the month of May. Spread over the 22 business days in the month, that is a daily filing rate of 4,383. The daily filing rate is a 12.0% decline on a year-over-year basis.

If one extrapolates the filing rates from the first five months over the rest of the calendar year, the prediction remains for just over 1.0 million total filings in 2013. This figure would be a 14% annual decline.

Annualized, the bankruptcy filing rate stands at 3.54 filings per 1,000 persons. The last time the filing rate was lower was November 2008, when the bankruptcy filing rate was still experiencing the dip in filings that occurred right after enactment of the 2005 bankruptcy law. If one takes a longer view and considers the filing rate gyrations around 2005 as a statistical anomaly, the last time the filing rate was this low was 1995.

Bankruptcy Filings Over the Next 12 Months

Bankruptcy filings have continued to decline, and using data supplied by Epiq Systems, my analysis suggests the same trend will occur over the next twelve months.

First, looking back at March and April, bankruptcy filings declined 12.0% and 11.8% respectively on a year-over-year basis. The daily filing rate in March was just short of 4,900 and in April was 4,575.

If we extrapolate these numbers out over the rest of the year, bankruptcy filings should just barely surpass 1.0 million for calendar year 2013. If filings continue for the rest of 2013 at the same pace they have for the first four months, the number will be closer to 1.1 million, but the filing rate is typically strongest in the spring and then tapers off each year. Thus, a figure closer to 1.0 million is more likely and that rate of filing would represent an annual decline of 14% in the number of U.S. bankruptcies for the second straight year in a row.

Bankrupt Churches

My colleague, Professor Pamela Foohey, has just posted a paper on SSRN about religious organizations that have filed chapter 11. While the Roman Catholic dioceses bankruptcies have grabbed a lot of attention, Foohey identifies 509 other cases filed by faith-based organizations from 2006 - 2011. The amount of work in this study is impressive. Foohey individually reviewed each of the 60,000+ chapter 11 cases filed during that time frame to find the faith-based bankruptcies. The result is a census of faith-based organizations in chapter 11, including churches, schools, and community-assistance organizations.

Does Chapter 13 Prop Up Bankruptcy Filing Rates?

Yesterday, I noted the 14.1% decline in U.S. bankruptcy filings during 2012. Bankruptcy filings did not decline at the same rate everywhere, of course, although they did decline in 89 of the 90 judicial districts in the U.S. (not counting judicial districts in U.S. territories). In the Middle District of Alabama, bankruptcy filings even actually climbed (although by only 9 total filings out of almost 7,800).

The table to the right shows the twenty federal judicial districts where bankruptcy filings declined the least. One thing immediately leaps out: many of these districts are places where the percentage of chaper 13 bankruptcies is very high.

Bankruptcy Filings Fall Dramatically in 2012

The 2012 calendar year bankruptcy statistics from Epiq Systems hit my in-box last night. They show that total U.S. bankruptcy filings declined in 2012 by 14.1 percent. Specifically, there were just over 1,185,000 filings in 2012 as compared to 1,380,000 in 2011.

The decline will not come as any surprise to regular readers of the blog. Bankruptcy filings have been declining since November 2010 and fell consistently throughout 2012. The question is whether bankruptcy filings will continue to decline. In a previous post, I thought they might level off in 2013, and I am working on a more complete analysis.

Today's Bankruptcy Statistics Challenge

A friend wrote me and pointed out that Chief Justice Roberts's annual report noted that bankruptcy filings had declined in "89 of the 90 bankruptcy courts." He wondered which court was the exception, and for that sort of information, he wrote me.

The question has become today's bankruptcy statistics challenge. You may put your answer in the comments, but no fair looking it up. There are a few caveats. First, the chief justice was citing the statistics for the government's fiscal year, which ran from October 1, 2011 to September 30, 2012. Second, the chief justice's statement was only for bankruptcy courts in the states and not any in of the territories.

Look for the answer in a post later today about the bankruptcy filing statistics for the 2012 calendar year.  Also, be on the lookout for a post with a disquisition on what one's life has become when your friends write to you to get answer to bankruptcy statistical questions.

Undocumented Debtors

Immigration issues continue to be a major political football, and the work of Jean Braucher, Bob Lawless, and Dov Cohen on race in bankruptcy garnered front-page NY Times attention this year. This makes the publication of Chrystin Ondersma's paper titled Undocumented Debtors particularly timely. The paper is the first-ever look (to my knowledge) at whether and how undocumented people file bankruptcy. The key finding is that while it seems legal--and indeed arguably explicitly contemplated by the bankruptcy system--that undocumented people may file, the rate of filings is very low--on the order of less than one percent of the rate of debtors in the general population. Ondersma also provides a good overview of the credit systems available to undocumented people, ranging from those offered by large national entities, such as ITIN mortgages, to informal mechanisms such as tandas.