243 posts categorized "Bankruptcy Data"

Does the Chapter 13 Filing Rate Tell Us Anything About Mortgage Foreclosures?

posted by Bob Lawless

A few days ago, I had the bright idea of looking at the chapter 13 filing rate in the different states and seeing if that told us anything about what might be happening with home mortgage foreclosures. Generally speaking, homeowners often will find it easier to save a home in chapter 13, and thus changes in the chapter 13 rate could give us some understanding of the financial distress being caused by the home mortgage crisis. It's a nice theory, but in practice the data are unilluminating on that point. There is great variation from state-to-state in the chapter 13 rate, making it difficult to draw meaningful conclusions from the data.

Chapter_13_ratio_by_statenov_2007Nationally, 38.8% of all November 2007 bankruptcy filings were chapter 13s, but the table shows the national figures masks considerable state variation. (The data are courtesy of AACER.) Bankruptcy experts will not find the state variation very surprising. In an 1993 article, Professor (and upcoming Credit Slips guest blogger) Jean Braucher documented how consumer bankruptcy attorneys can influence chapter choice. (See Braucher, 1993. "Lawyers and Consumer Bankruptcy: One Code, Many Cultures," American Bankruptcy Law Journal, 67:501-83.) On the heels of that article, Professors Teresa Sullivan, (Credit Slips blogger) Elizabeth Warren, and Jay Westbrook described important variations in bankruptcy practice that could not be explained by difference in formal rules but rather were likely the byproduct of differing cultures by local professionals. (See Sullivan, Warren & Westbrook, 1994. "The Persistence of Local Legal Culture: Twenty Years of Evidence from the Federal Bankruptcy Courts," Harvard Journal of Law & Public Policy, 17:801-865.) From these studies and others, we know that local legal culture plays a significant role in bankruptcy chapter choice.

The persistence of local legal culture makes it difficult to use a snapshot of differences in state bankruptcy filings rates or the percentage of chapter 13 cases as a proxy for the financial distress of homeowners. To make such a measure meaningful, one would have to follow the filing rate of particular states across time. In statistics-speak, we need longitudinal (over time) not cross-sectional (across observations) data. Bankruptcy filing data by state are difficult to get and assemble, especially going back in time--why that should be probably should be the subject of another post--making the task beyond what I have time to devote to a blog post. Thus, I'm going to say that we can't say a whole lot about the mortgage foreclosure crisis from the chapter 13 data.

U.S. Bankruptcy Filings Up from One Year Ago But Leveling Off

posted by Bob Lawless

2007_filings_per_day_thru_nov The monthly filing figures through November 2007 just became available courtesy of Automated Access to Court Electronic Records (AACER). Total U.S. bankruptcy filings in November 2007 were 73,892, but the better way to think about it is that there were an average of 3,695 filings in November per filing day (i.e., days the U.S. courts were open for business). Those figures are significant increases as compared to November 2006 when there were 57,316 total U.S. bankruptcy filings, an average of 2,866 per filing day. The average number of filings per filing day thus was 28.9% higher in November 2007 than it was twelve months before. For the first eleven months of 2007, total U.S. bankruptcy filings were 760,488 or 41.8% higher than the 536,237 bankruptcy filings in the first eleven months of 2006.

With these numbers and only one month left, we can make expect the following for total U.S. bankruptcy filings for the calendar year 2007:

  • 826,000 if filings continue through the end of 2007 at the same daily rate they have averaged for all of 2007
  • 834,000 if filings continue through the end of 2007 at the same daily rate they were in November 2007
  • 837,000 if filings after November 2007 represent the same proportion of filings (about 9.2%) as the filings after November 2006 represented of the total 2006 figures

Some may jump at simple explanations for the increase in filings since 2006, perhaps pointing to trouble in the subprime market or other consumer credit woes. I think there is not enough evidence to jump to those conclusions. The reasons for filing bankruptcy usually are multicausal, and historical study suggests that over the long-term outstanding debt is the primary determinant of the number of bankruptcy filings. Most significantly, bankruptcy filings generally lag their underlying causes. People don't rush out and file bankruptcy the moment financial troubles appear. Rather, evidence suggests that people typically struggle with financial trouble for a year or more before filing bankruptcy. The increase in 2007 bankruptcy filings are most likely attributable simply to bankruptcy filings returning to their "natural" level after the trough that followed the surge in bankruptcy filings just before the 2005 law.

Continue reading "U.S. Bankruptcy Filings Up from One Year Ago But Leveling Off" »

Are Bankruptcy Filings Increasing Less?

posted by Bob Lawless

Usmonthlybkrfilings A few days ago, I posted on the U.S. bankruptcy filing figures through October 2007 and projected that there will be 820,000 and 846,000 U.S. bankruptcy filings in the 2007 calendar year. In this post, I want to take a more extended look at the long-term trend going forward.

The data suggest that bankruptcy filings are not increasing at as great a rate as they were previously. That is not to say that bankruptcy filings are decreasing or even leveling off. Rather, the rate of increase is declining. This analysis will not necessarily hold true if conditions change, and some will argue that conditions already have changed because of the subprime lending crisis. All we can do, however, is analyze the historical data. Put differently, I have to make the same disclaimer as the rushed voice at the end of any brokerage commercial: past performance is no guarantee of future returns.

With bills pending in Congress to amend the Bankruptcy Code to help homeowners struggling with out of control mortgage debt, some have questioned whether the bankruptcy system could absorb the hundreds of thousands of new bankruptcies that might develop. The analysis here helps provide some information for that debate. Although one would predict that bankruptcies will continue to increase, we should not expect bankruptcies to continue to rise at the rate they have been for the past twenty months. Looking beyond my analysis here, the total number of annual U.S. bankruptcies is a little more than half of what it was before the 2005 law. There seems to plenty of room in the system to absorb more bankruptcies.

Why do I believe bankruptcy filings will continue to rise but not at the same high rate as in the past (again assuming no dramatically changed conditions)? Later in the post, I have a statistical forecast, but we can begin with just a simple look at the data. The first table to the right/above gives the monthly data for total U.S. bankruptcy filings since January 2006. Pushing the monthly data back before that date would give a misleading picture because the October 2005 changes in U.S. bankruptcy law caused a massive surge in filings and then a near total dearth of filings in the few months thereafter. Arguably, the January 2006 and perhaps the February 2006 data still reflect this abnormal statistical blip, but starting in January gives us at least one complete calendar year.

Continue reading "Are Bankruptcy Filings Increasing Less?" »

Update: 2007 Bankruptcy Filings Watch

posted by Bob Lawless

2007_filings_per_day_thru_oct The good folks at AACER have again been kind enough to send along monthly U.S. bankruptcy filing statistics for October. They always tell me not to worry about giving them credit, but their statistics are more timely than what we get from the U.S. courts. They deserve the credit.

This means it's time to update the 2007 bankruptcy watch. October 2007 saw 81,065 total bankruptcy filings as compared to only 67,542 filings for September. That difference is deceiving, however, because there were 22 filing days (i.e., days the U.S. courts were open for business) in October as compared to only 19 in  September. On a daily basis, October had 3,685 filings per day as compared to 3,550 in September, a 3.7% increase. With only two months of filing left, we can expect the following for annual 2007 filings:

  • 820,000 if filings continue through the end of 2007 at the same daily rate they have averaged for all of 2007
  • 838,000 if filings continue through the end of 2007 at the same daily rate they were in October 2007
  • 846,000 if filings after October 2007 represent the same proportion of filings (about 18.9%) as the filings after October 2006 represented of the total 2006 figures

I wanted to get the updated figures posted. Soon, I'll post some comments on the monthly trend we have seen since January 2006.

Reporting on the "Mortgage Meltdown"

posted by Katie Porter

Journalists have produced some really excellent stories about the rising foreclosure rate and the struggles of families to save their homes. I've previously blogged about an interesting LA Times piece about the lack of reliable data about foreclosure numbers; another favorite article is the NY Times story, Can These Mortgages Be Saved?, about difficulties that consumers have in obtaining loan modifications from servicers.

In recent days, however, the Wall Street Journal has published pieces about bankruptcy that contain inaccuracies. An editorial on October 24th, The Mortgage Meltdown, grossly mischaracterizes pending bankruptcy legislation. The bill, the Emergency Home Ownership and Mortgage Equity Protection Act of 2007(HR 3609), would reverse the existing preferential treatment in Chapter 13 bankruptcy law for home mortgages and permit debtors to modify their home loans in certain ways. The Wall Street Journal says that the legislation will "allow bankruptcy filers to treat home loans as similar to unsecured credit-card debt." The editorial then sarcastically posits "Guess how eager lenders will be to offer low mortgage rates if they have no better chance of collecting on a mortgage than they do on a credit card?" This characterization isn't mere alarmist hyperbole. It's flatly wrong. Mortgages are liens; they give the lender a security interest in the debtor's real property. Absent unusual circumstances, secured creditors retain their property interestsin the collateral. If they aren't paid--inside or outside of bankruptcy--they can foreclose on the property. In contrast, credit cards are normally unsecured debt. The lenders have no collateral. Unsecured debt and secured debt are treated differently in bankruptcy law, just as they are in state law. The apt comparison for HR 3609's proposal is that home mortgage lenders would be treated just like lenders whose collateral are vacation homes, or commercial property, or rental houses, or whose collateral are cars, motorcycles, or appliances. The Wall Street Journal should print a correction, making clear that the bill would not put mortgage lenders on par with credit card companies, and retracting its suggestion that the legislation would thereby cause mortgages to have the same interest rates as credit cards. Perhaps some would excuse the Journal because these statements were in an editorial. But a recent news article on bankruptcy as a home-saving device was also misleading.

Continue reading "Reporting on the "Mortgage Meltdown"" »

Counting Medical Bankruptcies

posted by Elizabeth Warren

About half of the families filing for bankruptcy do so in the aftermath of a medical problem (various calculations range from 46% to 63%.  Since my coauthors and I published a handful of academic papers on this, there has been a lively debate about whom to count among medical bankruptcies.  Those with big medical debts are counted, but measurement can be tricky as debt migrates to credit cards or home equity lines of credit.  Similarly, some people will pay the doctor, then put groceries on the credit card.  Others may have medical debts paid by insurance companies, but several weeks of lost time from work puts them under water.

But none of these ways of counting would cover this family that turned up in our bankruptcy sample.  Here is an excerpt from the telephone interviewer's side notes:

Continue reading "Counting Medical Bankruptcies" »

Bankruptcy Filings Continue to Rise in September

posted by Bob Lawless

2001to2007filingsAccording to the folks at Automated Access to Court Electronic Records (AACER), preliminary figures show total U.S. bankruptcy filings in September at 67,286. That represents an increase from the 76,959 filings in August. Huh? Well, the September filings were spread over only 19 business days, but the August filings were over 23 business days. Thus, on the basis of filings per day, September filings were 3,541 as compared to 3,346. That's a 5.8% increase in September over August. One cannot read a lot into monthly variations, but that is the highest daily filing rate since the enactment of the 2005 bankruptcy law.

Updating the 2007 filings watch we get a range of 807,000 to 852,000 filings by year end based on:

  • 807,000 if filings continue through the end of 2007 at the average rate for the first nine months of 2007
  • 828,000 if filings continue through the end of 2007 at the rate for August 2007
  • 852,000 if filings after September 2007 represent the same proportion of the total 2007 figures (about 71%) as the filings in September 2006 represented of the total 2006 figures

By any count, bankruptcy filings have been steadily rising since the 2005 bankruptcy law. But, as the chart to the right shows, claims that the total bankruptcy filings will soon equal their pre-2005 levels are overblown. Total filings in 2007 will be just slightly over 50% of what they were in 2004.

None of this should surprise us. The architects of the 2005 bankruptcy law set out to make bankruptcy more expensive and more time-consuming and less effective for people once they got there. The point was to drive away people from the bankruptcy courts. It looks like they got what they wanted. Of course, it's hardly a success to claim that bankruptcy filings are down. Consumers are hurting just the same, maybe more. Claiming victory by keeping people out of the bankruptcy system is like claiming victory over illness by closing the hospital.

Bankruptcy Filing Figures Through August

posted by Bob Lawless

2007_filings_per_day_2 Again, courtesy of the good folks at Automated Access to Court Electronic Records (AACER), here are some data about 2007 bankruptcy filing statistics through the month of August. According to AACER, there have been 537,712 bankruptcy petitions filed in the United States through August 2007. The total number of filings in August was 76,812 as compared to 69,016 in July. The difference is exaggerated because the foibles of the calendar meant July had two more workdays for the bankruptcy courts to be open than was true in August. On a "per filing day" basis, August had 3,340 filings per day as compared to 3,286 filings per day in July. Moreover, month-to-month variation in bankruptcy filings is more likely to be statistical noise than a meaningful difference.

For me, there are two interesting things we can take away from these data.

Continue reading "Bankruptcy Filing Figures Through August" »

US Trustee Report on Effects of Means Test

posted by Katie Porter

The U.S. Trustee recently released a report, Impact of the Utilization of Internal Revenue Service Standards for Determining Expenses on Debtors and the Court. This study was mandated by section 103(b) of BAPCPA. The U.S. Trustee contracted with RAND corporation to conduct the study, and Marianne Culhane and Michaela White were brought on as co-authors. As I've suggested before, these collaborations produce better studies that incorporate different viewpoints and methodologies. Compare the quality of this study with the Federal Reserve's "study" of credit card solicitations, which we highlighted about a year ago on Credit Slips.

The study is by no "means" (get it, hah!) the final word on the means test because the data come from only eight districts and the law on how to apply and calculate the means tests continues to evolve. Nonetheless, it is the most reliable national study that I have seen, and its findings are provocative. There is a lot to say about this study, but I start with the most basic point--how often do debtors come under the expense standards?

Continue reading "US Trustee Report on Effects of Means Test" »

Pottow & Zywicki: Together at Last!

posted by John Pottow

Prof. Todd Zywicki, with whom some Credit Slips readers might be familiar, had an interesting editorial in last week’s Wall Street Journal called “The Two-Income Tax Trap.” I wanted to alert readers to it in part because it is intriguing and in part because it is something on which Todd and I find some agreement.

It’s not a complicated argument. Taking a page from Prof. Elizabeth Warren and Ms. Amelia Tyagi’s playbook, Todd takes stock of what expenses have gone up over the past few decades as a second spouse has entered the work force. Todd’s point is that one of the biggies is taxes, in part because of our progressive tax structure. Thus when gross income increased 75%, tax expense increased 140%. I will call this his “positive” point. He makes an important contribution by underscoring the effect of a second earner’s income being treated by a higher marginal rate. 

Before moving onto the normative point, a quick substantive comment: Todd uses the marginal tax rate as a shorthand – to maximize precision, one should probably use the effective tax rate, which will dampen the distinction somewhat. But I’m OK with shorthand.  I'm just flagging for number crunchers.

And also a quick stylistic point: Todd’s editorial could be read as implying Elizabeth/Amelia were derelict in not reporting these tax numbers. I don’t think so. I think they were just netting out taxes (as they say) to do apples-to-apples comparison of “disposable” income, so we could basically see whether consumers were getting greedier.  (I also think the numbers are there in an endnote, but it's been quite some time since I read the book.)  Thus I don’t think Todd’s commentary should be seen as a criticism of their book, but rather an extension of it.

Now, onto the normative. Todd concludes that this large increase in the tax burden engendered by a second earner should serve as a call for flatter taxes. Here, I’m more agnostic. I haven’t thought through the issue that much. I suppose if income redistribution (an end which I support) could be guaranteed through other means, then surely it’d save some costs to flatten out the income tax code. So I might be with Todd all the way. But I’d probably have to think more on this normative issue before I gave him my full support. But for now, I’ll settle for agreeing with him on raising an interesting positive point.

How Much Credit Card Debt Per Household?--I've Lost $531 Billion

posted by Bob Lawless

I don't like to disagree with financial columnist Liz Pulliam Weston over at MSNBC.com or our fellow bloggers at The Consumerist. I especially don't like to criticize the Federal Reserve lest the men with black helicopters show up to take me away. (It's still not really clear to me where the Federal Reserve fits in the power structure, and this didn't help.) All of them do good work, especially you Federal Reserve! Pulliam Weston wrote a column this week called "The Big Lie About Credit Card Debt" and The Consumerist also picked up on the story. 

Pulliam Weston rightly criticized a recent press release from CreditCards.com that claimed the average American household owed $9,300 in credit card debt. She pointed out that figures comes from dividing the total amount of credit card debt by the number of households. Averages are deceiving. As Pulliam Weston explains, "[I]magine that you and 17 of your friends were having dinner with Bill Gates and Warren Buffett. The average net worth of a person at that table would be about $5 billion. The fact that everybody else's personal net worth was a lot less wouldn't affect the average that much because Bill and Warren are so much wealthier than the rest of us." (Personally, I like the anecdote about the person with  one foot in a bucket of ice water and another foot in a bucket of steaming hot water, but who's OK, on average.) The same point would be true for a small number of households with a huge amount of credit card debt. They would skew the average amount of debt owed.

Instead of the $9,300 figure, Pulliam Weston cites statistics from the Federal Reserve's 2004 Survey of Consumer Finance that, for persons who carried a credit card balance, the median amount owed was $2,200. Half would owe more than the median, and half would owe less than the median--that is what a median is. Her point is that U.S. households are not as desperately in credit card debt across the board as the CreditCards.com statistics would have you believe, but she also emphasizes that a sizeable number of U.S. households are in dire financial straits. My problem is that I can get the numbers from the Fed's Survey of Consumer Finance to jibe with other consumer credit figures it releases.

Continue reading "How Much Credit Card Debt Per Household?--I've Lost $531 Billion" »

Update on the 2007 Filings Watch

posted by Bob Lawless

Annual9807 The folks at Automated Access to Court Electronic Records or AACER provided Credit Slips with statistics on U.S. bankruptcy filings through July 21, 2007. Experts are watching these data because we want to know whether the steady rise in bankruptcy filings since enactment of the 2005 bankruptcy law will continue. Still, we have to be careful not to overinterpret these data. Month-to-month fluctuations are more likely the result of noise than represent a trend. Rather, we should concern ourselves with long-run trends, but we all knowing the saying about what happens in the long run. We need also to pay attention to the short-term but not get carried away.

With those cautionary notes, AACER's data show that there were 434,644 total U.S. bankruptcy filings from January 1 - July 21, 2007. Again, that is a total and hence includes both business and consumer filings. At the same point in 2006, there were only 288,839 total bankruptcy filings, meaning there has been a 50.5% increase over the same time last year. Mike Bickford, the chief manager of Jupiter eSources LLC which runs AACER, has helped me by thinking about these numbers in terms of "filing days."

In other words, how many filings per each day that the courthouse was open. As it turns out, there were 140 filing days from January 1 to July 21 in 2006 and 2007. A simple calculation tells us that there 3,105 filings per filing day so far in 2007 and 2,063 filings per filing day in 2006. So where are 2007 filings headed?

Continue reading "Update on the 2007 Filings Watch" »

Bankruptcy Among Low- and Moderate-Income Households

posted by Michael Barr

To the organizers of Credit Slips, thank you for inviting me to guest blog this week. Bob Lawless asked me to focus on aspects of my empirical research regarding the financial services lives of low- and moderate-income (LMI) households. In this first posting, let me just begin to introduce the data.

With the Survey Research Center at the University of Michigan, I conducted an in-person survey of a random, stratified sample of more than 1,000 LMI households in the Detroit metro area. The surveys averaged about an hour and 15 minutes and covered a broad range of financial services behaviors, preferences and attitudes. Our response rate was 65%. Among the LMI households in our study, the median household income was $20,000. About a third of these households lived below the poverty line and 29% lack a checking or savings account.

Among LMI households, nearly 4% reported that they had filed for bankruptcy last year, significantly higher than the national average for 2005-2006, and somewhat higher than the Wayne County average.  Some 15% of households have filed for bankruptcy at some point in the their lives, and 1% of households have filed more than once.

Because the study involves a random sample of LMI households, we can compare those who have filed for bankruptcy and those who have not filed. On many dimensions, these groups are similar. They are equally likely to be black or female, and the average age in these two groups is the same. However, those who have filed for bankruptcy are more likely to have greater than a high school diploma than those who have never declared bankruptcy. Filers' median income of $28,000 is $10,000 higher than those who have never filed. Filers are also 9 percentage points more likely to be separated, widowed or divorced than those who have not filed; we do not have data on the time periods for changes in marital status and cannot relate these to the timing of bankruptcy.

Overall, filers are more likely to have higher asset holdings, as well as some form of debt, more sources of debt, and higher median levels of indebtedness than non-filers. Filers are nine percentage points more likely to hold credit card debt, four percentage points more likely to have mortgage debt,seven percentage points more likely to have unpaid medical debt, and over ten percentage points more likely to have outstanding student loans.

We measure a range of financial hardships experienced by respondents in the 12 months prior to the interview, including major medical expenses, food insecurity, eviction, utilities and telephone cut off, and threats of foreclosure. Hardships are widespread among LMI households. Over 60% of respondents report experiencing at least one hardship over the last year. About 27% report a major medical expense; 17% report not having enough food to eat; 18% report having their phone disconnected; 10% had their utilities cut off; 6% were evicted; and 3% were threatened with foreclosure.

Bankruptcy filers were more likely to experience most of these hardships. Of those who declared bankruptcy in the last year, 100% report having experienced one or more of these hardships in the last 12 months. Nearly 37% experienced job loss and nearly 30% had major medical expenses. Twenty-two percent went hungry; 24% reported having their phone disconnected; 23% had their utilities cut off; 18% were evicted; and 3% threatened with foreclosure.

While hardship, job loss and marital status differ significantly across filers and non-filers, unobserved factors may account for differences across these groups as well.

Over and Over Again

posted by Katie Porter

The Bankruptcy by the Numbers feature in the June American Bankruptcy Institute Journal contained a study on the prevalence of repeat bankruptcy filers. Several things about the study were good news. First, its author, Dr. Jean Lown, is a consumer science researcher who specializes in family finance. Legal scholars benefit from learning about how other disciplines approach research on consumer financial issues. Consumer educators may play an increasingly important role in the bankruptcy system as consumer debtors must satisfy credit counseling and financial education requirements. It makes sense to connect these folks with the bankruptcy community. Second, the research was funded by the ABI, and it's great to see the ABI supporting consumer bankruptcy research (for those who don't know, the ABI has poured lots of money into a big study of professional fees in business bankruptcy). Third, it's hard to drum up motivation for studying the dark underbelly of the bankruptcy system.  Repeat filers are troubling. Bankruptcy relief isn't free. Families spend money to file; courts and trustees process their cases; creditors retain counsel and submit proofs of claim. When some families re-enter the bankruptcy system, it raises concern about the core function of consumer bankruptcy--rehabilitation of debtors. Lown deserves credit for tackling this issue. Fourth, her key finding is that there are few people who file over and over again. In a total sample of nearly 5,000 debtors drawn from 10 districts, she found that first-time filers represent a hefty majority of bankruptcy cases. She concludes that repeat or serial filers are not a significant problem in most districts. Districts where Chapter 13 is popular, however, had significantly higher numbers of repeat and serial filers. While still a small fraction of all cases, Lown suggests that families re-entering the system partially explain the higher filing rate per capita in states with a high fraction of filers choosing Chapter 13. 

US Courts Data on Bankruptcy Filings . . . From March

posted by Bob Lawless

On Wednesday, the Administrative Office of U.S. Courts ("AO") released quarterly filing statistics -- for the quarter ended in MARCH! They're getting a little bit better. As reported in an earlier blog post, the AO had been releasing quarterly statistics later and later. The last round of quarterly statistics were released 107 days after the end of the quarter. These latest statistics were released 88 days after the end of the quarter. Of course, we are almost now at the end of the second quarter of the calendar year, meaning statistics from the first quarter are now likely overtaken by other events.

Whatever value comes from these stale filing statistics gets lost amidst the misleading bureaucratese of the AO's press release. The quarterly press releases always compare the current 12-month filing rate to the filing rate from the previous 12-month filing rate. In this case, the press release compares filings from March 31, 2005 to March 31, 2006 to filings from March 31, 2006 to March 31, 2007. The former period includes the huge surge of filings that occurred as debtors tried to beat the effective date of the 2005 bankruptcy law. The press release mentions that surge but continues throughout to compare filings between the two periods. Hence, the message of the press release is captured in its title, "Bankruptcy Filings Drop 61 Percent in March 2007 12-Month Period." Comparing bankruptcy filings over the two time periods is about the same as comparing the number of persons who consider the West Wing to be their favorite television show today as compared to 2005. They're simply different things going on.

Continue reading "US Courts Data on Bankruptcy Filings . . . From March" »

One to Lie Awake at Night About

posted by Bob Lawless

At the end of 2006, there was $12,588,200,000,000 outstanding in household debt -- defined as consumer debt and mortgage debt combined. But there was only $11,065,500,000,000 in personal income for 2006. (Those are trillions of dollars.) If the United States spent none of its personal income for one year on "trivial" things like food, shelter, taxes, and medical care, it would still be inadequate to pay off our car loans, home mortgages, credit cards, and other personal indebtedness. This was not true as recently as 2003.

Source: U.S. Federal Reserve and the U.S. Bureau of Economic Analysis.

Get Last December's Figures Today!

posted by Bob Lawless

Only 107 days after the close of the calendar year, the Administrative Office of U.S. Courts (the "AO") has released bankruptcy filing statistics for 2006. The AO released the statistics in a press release under a headline stating "Bankruptcy Filings Plunge in the Calendar Year 2006" and contrasted the 617,660 filings in 2006 with the 2,078,415 filings in 2005. Thus, the AO's statistics conveniently match the conventional story told before passage of the 2005 bankruptcy law, namely that the system was plagued by filers who did not need it and who would be purged by a bankruptcy law that cracked down on abusive filings.

There are only two things wrong with the AO's press release. It is woefully outdated on the day of its release, and its comparisons are misleading.

First, let's explore the press release's old information. Two weeks ago, I posted about private data from AACER for the first quarter of 2007 that show U.S. bankruptcy filings on a trend to reach or perhaps top 1,000,000 in this calendar year. These same private data were the subject of an AP story. We are working our way back to the filing levels experienced before the 2005 law and much more quickly than I expected. Rather than bankruptcy filings plunging, the current view is that bankruptcy filings are on an upward trend.

One might ask why it is taking the AO so long to release filing data. Looking at the dates on the press releases from the AO's web site, it has released the previous calendar year's filing statistics on these dates:

  • February 19, 2002
  • February 14, 2003
  • February 26, 2004
  • March 1, 2005
  • March 24, 2006
  • April 17, 2007

It has been a long, slow steady progression of delay. This year, we did not receive the filing statistics for the last quarter of 2006 until after the first quarter of 2007 was already in the books. As my previous post on this year's filing trend indicates, receiving filing statistics that are over three months old can provide a misleading picture. I also posted about a data access issue--whether the AO is giving some persons access to their filing data before releasing them publicly. The AP story mentioned earlier suggested that some persons might already have seen the AO's statistics for the first quarter of 2007. If those statistics are available, they should be released to the general public.

Finally, I wanted to spend a moment on why the AO's press release is misleading where it compares 2006 filing data to the same data from 2005. As is well known, there was a huge number of persons who filed bankruptcy in the days and weeks leading up to the effective date of the 2005 bankruptcy law. Almost 550,000 people filed bankruptcy in the last quarter of 2005 and almost all of them just before the law went into effect on October 17, 2005. (See Charles J. Tabb, Consumer Bankruptcy Filing and Trends, available at http://ssrn.com/abstract=931172 for more details, especially at pp. 4-11). Those filings were done to avoid the harsh effects of the 2005 law, and thus the 2005 figures represent a large number of persons who would have filed later in 2006. Put another way, the 2005 law increased the number of filings in 2005 and decreased the number of filings in 2006. Although there is no question that filings declined in 2006, a direct comparison of the two years exaggerates the decline.

Oh, and the AO's data undercount business filers and overcount consumer filers (see here and Robert M. Lawless & Elizabeth Warren, The Myth of the Disappearing Business Bankruptcy, California Law Review, vol. 93, p. 745 (2005)), but you're probably all sick of hearing me say that.

Can We Have Those Numbers Too?

posted by Bob Lawless

In my previous post about U.S. bankruptcy filing trends, I mentioned an AP wire story at the very end of the post. In discussing the number of U.S. bankruptcy filings for the first three months of 2007, the AP story states:

The American Bankruptcy Institute, which gets its information from the Administrative Office of the U.S. Courts, reports a 46 percent filing increase from January to March. Last month boasted the highest filing rate in a single month since the Bankruptcy Prevention Act and Consumer Protection Act took affect in 2005.

Data from the Alexandria, Va., organization shows a steady increase in filings so far in 2007, with about 50,000 cases filed in January, 55,000 in February and more than 73,000 in March.

Really? As of this writing, these data are not on the web site for the Administrative Office of U.S. Courts web site, and I am not aware they have been publicly released. Indeed, the AOUSC has not released the data for the last quarter of 2006, yet alone the data for the quarter that just ended. Typically, the AOUSC releases these data two or three months after the quarter ends. Is the AP's story accurate? Did the American Bankruptcy Institute get its data from a private source, and the AP misattributed it? If not, would there be any reason for the AOUSC not to release basic filing statistics if the AOUSC can generate them this quickly?

Full disclosure: I am a member of the American Bankruptcy Institute, which has over 11,000 members.

U.S. Bankruptcy Filings Back Over 1,000,000?

posted by Bob Lawless

Based on new data about filing trends in the first part of 2007, I have a prediction--there will be close to or even more than 1,000,000 U.S. bankruptcy filings in the 2007 calendar year. The folks at AACER have provided data showing that there were 72,945 bankruptcy filings during the month of March. That was 3,316 filings per day (measured by business days), a 7.3% increase from the previous month. That comes on the heels of a 17.6% increase in filings per day in February as discussed in a previous blog post. The per day filing figures for February and March 2007 are respectively 69.6% and 56.6% higher than one year previously. Bankruptcy filings are on the rise and dramatically so.

Extrapolating from these figures, we can make some guesses at where bankruptcy filings might end up for the 2007 calendar year. The AACER data show that there were 186,788 total bankruptcy filings from January - March 2007. If bankruptcy filings per day remain constant through the rest of the year, we will have 821,044 total filings. Of course, it is unlikely that filings per day will remain constant, especially when one considers the growth at the beginning of the year. If we assume that March's 7.3% growth rate will continue throughout the year, we will have 1,088,297 total bankruptcy filings in 2007. Neither assumption--no growth or a steady 7.3% growth--is likely to occur. For example, we know from a Credit Slips post by guest blogger Ronald Mann that bankruptcy filings historically hold steady or even slightly decline in the summer months. Perhaps the estimates are best viewed as outer boundaries with the expected outcome being just shy of 1,000,000 total filings. As a comparison, total bankruptcy filings were just shy of 1.6 million in for the twelve months ended June 30, 2005 (the last statistical year completely unaffected by the huge rush in filing) were 1,600,000.

Continue reading "U.S. Bankruptcy Filings Back Over 1,000,000?" »

Bankruptcy Filings Up 18% in February 2007

posted by Bob Lawless

The folks at Automated Access to Court Electronic Records or AACER regularly collect data from all the bankruptcy courts for creditors and attorneys. They have a wealth of information that does not show up in the mainstream media. Most recently, they tell me that there were 58,640 total U.S. bankruptcy filings in February 2007 as compared to 55,088 total U.S. bankruptcy filings in January 2007. OK, that looks like a slight increase, but looks are deceiving. It's actually a fairly hefty increase. The February filings were spread over only nineteen business days while the January filings were spread over twenty-one days. On a daily basis, the February filings were up 17.7% as compared to January.

Certainly, one month's worth of filing data does not a trend make. Also, these number are for total bankruptcy filings, not consumer filings alone. Remember, however, that according to the government, business filings are a minuscule percentage of total bankruptcy filings, and that problems with the way the government counts business filings may make total bankruptcy filings are more reliable data point anyway, as I have discussed previously. With those quite important caveats about the data in mind, there are a few things that strike me about AACER's statistics.

First, the increasing numbers of filings are completely consistent with the "word on the street." Privately, bankruptcy attorneys have told me they have seen increased numbers of consumers seeking bankruptcy. Although the 2005 bankruptcy law substantially lowered the number of bankruptcy filers in its immediate wake, we know that filings have been on a steady increase since the law's effective date, and these latest numbers are further confirmation of that fact. I do not predict that filing levels soon will return to the same numbers as they were just before the 2005 bankruptcy law was enacted (about 1,500,000 per year).

Still, we are on a pace to see substantial increases in the number of annual bankruptcy filings. If we apply the daily filing figure from February throughout the remainder of the year, make the conservative (and likely unrealistic) assumption that there will be no further increases in the filing rate for the rest of the year, and then add the numbers we already know from January and February, there will be approximately 765,000 total bankruptcy filings in the U.S. during 2007. The AACER folks tell me there were approximately 585,000 total bankruptcy filings in 2006. (As of this writing, the government figures have not been released.) Thus, we are on a pace for a 30.7% increase in bankruptcy filings during the 2007 calendar year. If the bankruptcy filing rate continues to rise beyond the daily rate in February, U.S. bankruptcy filings for 2007 could come close to or top 1,000,000.

The Myth of The Rational Borrower -- Pt. III

posted by Ted Janger & Susan Block-Lieb

Okay, in our first post we suggested that a behavioral model of consumer lending that hypothesized a rational lender and a heuristic borrower would predict three effects from BAPCPA: 

  • That the consumer bankruptcy filing rate would fall (no big surprise there).
  • That the credit card charge-off rate would fall, but rebound.
  • That consumers' ex ante borrowing decisions would not be altered by restricted availability of the bankruptcy discharge.

With regard to the first prediction, it is well known that bankruptcy filings spiked up in advance of the effective date of BAPCPA, and then plunged.  According to the Administrative Office of the United States Courts, the number remains depressed, but it has been rebounding -- quickly in the second quarter of 2006 and a little bit more slowly in the third quarter.



It is important to recognize that it is still way too early to tell how things will settle in. Bankruptcy lawyers and bankruptcy judges are still adjusting to practice under the new Act.  Over time, as practices stabilize in various districts, and lawyers regain an ability to handle cases efficiently, one might expect the filing rate to rebound.  In short, we have no idea what the ultimate equilibrium rate of filing will be.

More importantly, the bankruptcy filing rate has never been a particularly good measure of the number of families in financial distress.  A better indicator of how many families are having difficulty managing their debts is the percentage of credit card debt that is charged off each quarter (the lavender line below).  Here, too, BAPCPA has had an effect. The charge-off rate spiked in anticipation of October 17, 2005 as families that thought they might need bankruptcy filed (and thus charged off debt) in anticipation of the new law's effectiveness.  The difference here is that the rebound has been much more pronounced.  While chargeoffs are not yet back to the level of late 2005, they are getting close.

Charge_off_table Charge_off_2

Moreover, delinquency rates are already above where they were in the third quarter of 2005.  Again, while we don't know where the new equilibrium will be, there is reason to think that even if the bankruptcy rate remains depressed, the effect on the level of consumer loan default rates will be much smaller.

What is most striking, however, and strongly suggestive of our behavioral model for consumer borrowing decisions is that, as far as we can tell, the massive changes in the bankruptcy law in late 2005 have not had any discernible effect on consumers' ex ante borrowing decisions.  For the two key measures of consumer indebtedness published by the Federal Reserve system, the consumer Financial Obligations Ratio and Debt Service Ratio, October 17, 2005 was a non-event.  Consumer debt loads showed no discernible change surrounding the effective date of BAPCPA.


Finally, the aggregate amount of consumer debt outstanding continues to grow as well.


Indeed, aggregate credit card debt has increased at rates that are higher (or at least as high) as the pre-BAPCPA rates of increase.

In short, a behavioral model of consumer lending suggests that tightening up on the bankruptcy discharge will do very little to change ex ante consumer borrowing decisions, and hence it will do little to change either the underlying level of credit card default or the number of families in financial distress.  We see little in the above data to contradict this intuition.

The Rise of Chapter 13

posted by Katie Porter

Despite credit industry claims that BAPCPA is succeeding in reducing the number of bankruptcies, the 2006 bankruptcy filings may well be a poor predictor of the future number of total consumer bankruptcies. The run-up in filings before the effective date of the law, publicity and misunderstanding about the current law, an adjustment to higher fees for bankruptcy and the exit of some attorneys from bankruptcy practice are all likely factors in the overall drop in filings in 2006. Hidden within the gross number of cases is an interesting trend in the relationship between Chapter 7 and Chapter 13 filings.

Based on year-to-date figures running through December 2nd that were provided by Bankruptcy Lookup, the proportion of Chapter 7 and Chapter 13 is wildly different in 2005 and 2006. In 2005, Chapter 7s were 81% of the 7/13 caseload and Chapter 13s were 19%. In 2006, there is a dramatic jump in the proportion of Chapter 13 cases--42% of all Chapter 7 and Chapter 13 cases are Chapter 13s. On a district by district basis, from what my poking around and talking to people has turned up, the absolute number of Chapter 13 filings are almost back to pre-BAPCPA levels in many districts.

I'd really like to hear your explanations or insights on this trend. Higher mortgage foreclosures and housing delinquencies could be pushing more homeowners to seek help from Chapter 13. Another possibility is that the dramatically higher fees for bankruptcy are pushing more people to file Chapter 13 so that they can pay their fees over time. Or maybe these numbers are the means test at work? Or more accurately, the spectre of the means test--fear of the additional scrutiny that comes with filing an above-median Chapter 7?

The 33% Solution

posted by Bob Lawless

Debtor audits begin today. In the 2005 bankruptcy amendments, Congress decreed that one of every 250 cases shall be randomly audited under procedures established by the Executive Office for U.S. Trustees. In addition, Congress declared there shall be an audit . . . and here is where it gets really fun . . . of every schedule "of income and expenses that reflect greater than average variances from the statistical norm of the district in which the schedules were filed." Greater than average variance from the statistical norm. How erudite. How brilliant. Who says Americans lag the world in math education?

Continue reading "The 33% Solution" »

No Big Chapter 11s

posted by Elizabeth Warren

Remember 1984?  Terrible clothes, big hair, westernwear on dimestore cowboys?  That was also the last time Chapter 11 filings were lower than they are right now.  I'd heard some grumbling, but Lynn LoPucki sent me the data from his remarkable Bankruptcy Research Database (BRD).  Amazing.  (The numbers are in the continuation.)

With record sales of junk bonds, these companies are not deleveraged and somehow better able to withstand economic shocks.  So what's going on?  I have three theories, but I could be overlooking something.

1)  Bankruptcy law is well-settled, so businesses now do private, non-bankruptcy bankruptcies in which everyone gets slightly better than their likely Ch 11 payouts. 
2)  A few hedge funds are controlling all the action, calling the reorganization shots privately and making credible threats that there will be no DIP financing, which makes bankruptcy look very unattractive to a debtor who is in the clutches of the funds.   
3)  Companies are refinancing and refinancing, until they eat up all their assets--a strategy that keeps them out of bankruptcy for now, but that will promote more crashes in the future. 

Other ideas?

Continue reading "No Big Chapter 11s" »

Distress or Strategy

posted by Elizabeth Warren

One of the most contentious debates of the past two decades has been the argument over the reasons for increases in bankruptcy filings.  Some believe  consumer debtors file for bankrutpcy largely because they have run out of other options following significant financial disruptions, such as job loss, medical problems and family break up.  Teresa Sullivan, Jay Westbrook argued this position in Fragile Middle Class based on 1991 studies of the families that filed, and Tyagi and I add more data using 2001 Consumer Bankruptcy Project in Two-Income Trap.  Fay, Hurst & White analyzed PSID data on the general population and concluded that debtors were more strategic, filing when it was economically rational to do so and not when triggered by other events.  (Fay, Hurst, White, The Household Bankruptcy Decision, 92 American Economic Review 706 (2002))

Now comes Jonathan Fisher at the Bureau of Labor Statistics with a new paper that analyzes the same PSID data White and her coauthors used.  He has several interesting findings, but two are highly relevant to the financial-distress versus clever-strategy debate.  The first is that people do not file when they could best maximize their benefits.  If debtors behaved like the rational maximizers beloved by all economists, then they would have filed for bankruptcy at least a year earlier, according to Fisher.  Instead, they held off, kept paying and filed only later.   What held them back--stigma?  Fisher suggests that they filed only when it was clear that they were in a deep enough hole that things were never going to get better. 

Fisher also noted that the clever-strategy folks have a problem with the fact that about 17% of the population would benefit from bankruptcy, but only about 1.5% actually file.  But Fisher made an interesting observation about the benefit-but-not-file group:  they were in a lot better financial shape than the benefit-and-file group.  While Fisher doesn't push any conclusions about this, the finding is consistent with a picture of debtors who do not want to file for bankruptcy, no matter how attractive bankruptcy might seem to an economist.  Instead, these people file only when the pressure from their creditors are greater and the likelihood they can ever pay these debts off is smaller.

The PSID data pose substantial challenges for both White and Fisher.  For example, there is gross under-reporting of bankruptcy filings (.42% in PSID when national rate was .89%). This means either the sample isn't representative of Americans generally or people are concealing their bankruptcy filings even as they fill out PSID questionnaires.  ("Bankruptcy?  Me?  No way!") 

The paper has many nuggests, but the headline finding goes right to the question about who uses the bankruptcy system.   

More on Filing Rates

posted by Ronald Mann

Following up on my post from Monday, Charles Tabb has posted a new paper on SSRN, Consumer Bankruptcy Filings: Trends and Indicators.  He uses A.O. data through the first half of 2006 and suggests, consistently with my post, that the long-run filing drop will not be as substantial as many seem to think.

He also looks at the Chapter 7/Chapter 13 mix and notes that the Chapter 13 filing rate is not as high as you would expect given the stated motivation of BAPCPA.  Bill Whitford's paper in the Illinois symposium offers some good reasons why you would expect the Chapter 13 filings to be low, and I think Charles's paper buttresses that.  Looking at the weekly Lundquist data to which I referred on Monday, I have a similar take on the Chapter 13 filings.  Although the share of filings has been quite high since BAPCPA, it has been steadily trending downward throughout 2006, getting closer and closer to the pre-BAPCPA filing share.  And the high filing share plainly is an artifact of the preternaturally low level of post-BAPCPA Chapter 7 filings, because the number of Chapter 13 filings after BAPCPA has been much below pre-BAPCPA levels.

Finally, the last part of Charles's paper provides a useful catalog that shows how bankruptcy filing rates correlate roughly with several indicators of consumer indebtedness, including such things as total borrowings and credit card delinquencies.  He clearly is on the right track there.  In Charging Ahead I present some detailed data on credit card borrowing and consumer credit, with some multivariate regressions finding that credit card borrowing is significantly related to bankruptcy filings, even when you account for broader borrowing trends.

Interesting paper worth the read!

One Call Too Many?

posted by Ronald Mann

If most bankruptcy is induced by external factors -- divorce, health problems, and job loss being the most commonly mentioned -- we still don't really know why people call lawyers when they do.  Is it too many calls from a collection agent?  Or perhaps a collection lawsuit is filed.  I suspect that most families use the legal system only when they are already involved in it.  This question of course can be addressed through surveys, but I am considering a project designed to shed some light on this question using quantitative data about bankruptcy filings.

Weekly bankruptcy filings over the last several years reveal several patterns.  For example, at the end of each year, Chapter 7 filings fall steeply during December but rise shortly after the first of the year.  Total filings fall sharply after the first week of the year and then increase steadily through the first quarter (until April 15).  Chapter 13 filings, by contrast, are more evenly distributed throughout the year.  Notably, both Chapter 7 and Chapter 13 filings show a monthly peak.

This led me to wonder what would cause bankruptcy filings to surge on a monthly basis.  In Texas where I live the obvious answer is foreclosures.  Because all foreclosures in Texas happen on the first Tuesday of the month, it might be possible to isolate the share of bankruptcy filings motivated by foreclosure avoidance.  Georgia has a similar statute, so I plan to collect the number of Chapter 7 and Chapter 13 filings by individuals in Texas and Georgia on each date from January 1, 2004 through December 31, 2006.  The statistical analysis might be tricky, especially if foreclosure-motivated filings are a small share of filings.  And I don't see any easy way to account for differences in state foreclosure law or practice.  Still, a discernible rise in the last few days before the foreclosure date might quantify a share of filings attributable to foreclosures.

Looking forward, what would it tell us about bankruptcy filings if we know how many were filed to protect homes?  Also, how can we quantify bankruptcy filings that might be attributable to other causes?  Ultimately, I would be interested in trying to isolate the filings caused by informal collection practices -- people trying to escape what they perceive as harassment.  The policy initiative I would like to explore is the idea that borrowers would benefit if lenders were forced to initiate formal collection procedures more quickly.  When I interviewed collection attorneys several years back, one of the things I learned is just how much information collection calls can produce.  People are willing to give out bank account numbers and places of employment that enable the formal collection actions to proceed.  If the caller can persuade the debtor to make even a single $10 payment, the collector then has access to the acccount information from that check.  It is not clear how much of this activity is efficient.  More fundamentally, as I argue elsewhere, procedures designed to push individuals into bankruptcy more rapidly might be beneficial.

On the Immovability of Bankruptcy Filings

posted by Ronald Mann

Count me in the group that is skeptical about the role of the legal system in influencing overall bankruptcy filing rates. Sure, I can see that the raw filing rates in the United States are a lot higher than they are in other countries. But when you account for factors like level of indebtedness, use of credit cards, and general economic conditions, the apparently large differences between the United States, on the one hand, and the UK and Japan, on the other, seem to disappear. The data suggest that the overwhelming majority of bankruptcy filings are inevitable, and that the principal effect of legal changes is to accelerate or defer the time of filing.

So I have been watching with interest the trends in filing rates since BAPCPA. The conventional view, of course, is that the filings are much lower than they were before BAPCPA and that the mid-2006 plateau in filings suggests that filings have stabilized at a level less than half of the pre-BAPCPA level.

But I’m not convinced. It is true, of course, that the filings for 2006 are much lower than they were in 2004 and 2005. Currently they are about 12,000 per week, as compared to 37,000 per week a year ago and 32,000 a week two years ago. It also is true that the 2006 filings seemed to plateau from around the beginning of April to the middle of August, a fact that might suggest stabilization. But neither of those facts tells us ANYTHING about filing trends. During 2004 and 2005, filings per week declined steadily for much of the middle of the year (weeks 10-28), the same period during which filings reached an apparent plateau in 2006. Thus, if we consider annualized filing trends, the mid-year plateau in 2006 in fact might reflect a push back towards the pre-BAPCPA filing level. To illustrate, the figure below shows the 2004 filings (not affected by the passage of BAPCPA), the 2006 filings, and the difference between 2006-2004.  {Apologies for my lack of graphics expertise.}  The trend line superimposed over the difference line suggests that in the first eight months of this year the relative increase in filings has eliminated about one third of the difference between pre-BACPCPA and post-BAPCPA filing levels.


For me, the hot issue in the consumer credit literature right now is learning what motivates individuals to file at the TIMES that they file. So the passage of BAPCPA provides a natural experiment to see how the statute affects filing dates. There are two obvious filing trends connected with the passage of the statute. First, the “early filing” effect: a LOT of people filed before BAPCPA who otherwise would have filed later. That effect should depress filing rates after BAPCPA until that effect plays out. Second, the “deferral” effect: the provisions that make filing more costly, more bureaucratic, and more humiliating should defer filings until people are deeper in distress. That effect should depress filings initially but ultimately fade away as well.

What is most provocative about the data is the long period over which those effects have played out. I would not have expected pre-BAPCPA early filers to have filed a full ten months early. But if we discard that explanation, we have to think that the deferral effect operates over a similarly extended period, so that the steady upward trend in filing rates reflects the period during which  the deferred filings are slowly rising to their “normal” level. If we have not yet reached that level, BAPCPA is deferring some filings more than ten months.

Charge-Offs and Bankruptcy Filings

posted by Bob Lawless

Chargeoff_2 There was some rumbling that it was odd that both credit card charge-offs and bankruptcies were down over the past year, or at least so I was told. (A "charge-off" occurs when a bank removes the account from its books as uncollectible and takes a loss.) Apparently, the reasoning was that charge-offs were alternatives to bankruptcy. A rise in one would correspond to a decrease in the other. It was not clear to me that this should be the case. It seemed more likely that charge-offs and bankruptcy filings were complementary. More bankruptcies meant more banks would charge-off credit card loans, and charge-offs could indicate future bankruptcy filings.

A wild thought occurred to me, which was to look at the data and see what the historical trends were. The bankruptcy filing data, although problematic, are readily available from the Administrative Office of the U.S. Courts, and the Federal Reserve tracks the charge-off data. The chart to the right tracks the year-to-year percentage change in the rates of total bankruptcy filings per capita and credit-card charge-offs. The red line represents credit-card charge offs, and the blue dots are for the bankruptcy filing rate. Click on the graphic for a slightly larger image.

A few comments about the data are in order. First, the data are for 12-month periods ending June 30 of each year. In my own analyses of bankruptcy filing rates, I have always used that period because historical government statistics were computed over that time frame, which coincided with the federal government's historical fiscal year. Continued use of that convention allows comparability with historical statistics. The credit-card charge-off data were taken from the Federal Reserve and represent seasonally adjusted data of charge-offs at all banks (click here for the data). The bankruptcy filing data are for total bankruptcy filings. It arguably might be better to use the government's data for nonbusiness filings, but those data are problematic as I have previously blogged and written about with fellow blogger Elizabeth Warren (The Myth of the Disappearing Business Bankruptcy, 93 Cal. L. Rev. 745 (2005)).

Looking at the graph, two things are readily apparent. First, I need to become more proficient with my statistical software, and second my university did not provide me with a decent graphics editing program (or I am just not any good with the software they did give me). Nevertheless, the graph reveals some interesting patterns. Most substantively, both statistics appear closely related and generally move in the same direction (r = 0.827). Also, credit-card charge-offs have much higher variance than do bankruptcy filings. The peaks and valleys of the charge-off line are much steeper than the corresponding peaks and valleys for the bankruptcy filing data. When charge-offs go down, they go down much more than do bankruptcy filings, and when they go up, they go up much more than bankruptcy filings.

The higher variance is difficult to explain. A working hypothesis that I have is that bank regulatory cycles somehow interact with bankruptcy filing rates. As regulators push banks to clean up their bad loans, the banks may push people toward bankruptcy. As banks' balance sheets look better, the regulators lay off, and consumers can borrow easier (and thus stave off bankruptcy for a while longer). That explanation would first show up (presumably) in banks' charge-off decisions. Right now, it sounds like a great theory, but without data it's only a theory.

Credit card delinquency rates should also be related to bankruptcy filing rates. In theory, credit card delinquencies should precede and be predictive of bankruptcy filing trends. I will post soon with data comparing credit card delinquency rates with bankruptcy filings.

Job Security Polling Data

posted by Melissa Jacoby

Employment problems figure prominently in discussions about personal bankruptcy filings, so both the perception and reality of job security are relevant to those of us who study or work in the debtor-creditor system or who are trying to figure out whether people adequately recognize and prepare for adverse events.  Karlyn Bowman, a resident fellow of the American Enterprise Institute, has just posted a very useful updated set of major polling data on work and workers' perceptions -- see here for the press release and here for the report containing the polling data. 

It is particularly interesting to compare responses to questions about events that actually have happened (in the past to themselves or to other people) with questions about perceptions of their own job security risk.  For example, in a 2005 poll that asked whether their employer had laid off any employees in the past six months, 27% reported that there had been layoffs.  And 22% in a 2005 poll reported having been personally laid off or fired in the past five years (I can't tell from the report whether these 2005 results are from the same or different polls - check out pages 10-12 of the report).  But in April 2006, only 10% said it was very likely or fairly likely that they would lose their jobs (15% said they were worried about being laid off in a 2005 poll, in response to a differently worded question).  Readers also may want to check out the results of the questions about wage and benefit reductions.  Although interpreting the job loss findings together should be undertaken with care, they appear to present an interesting contrast to polling respondents' worries about falling deeply into medical debt that I wrote about when Credit Slips first began. 

Cycling Through Chapter 13

posted by Melissa Jacoby

Scott Norberg and Andrew Velkey's seven district longitudinal study on chapter 13 has just been published in the Creighton Law Review (volume 39, p. 473).   It contains too many interesting findings for just one post, so I will focus for now on repeat filings.  In Norberg and Velkey's words, "Among the most remarkable findings of the Project is that at least half of all of the Chapter 13 debtors in the sample had filed one or more bankruptcy cases in addition to the sample case."  (p. 497, emphasis added).  The percentage could be higher because of limits of the PACER system.  Most of the prior or subsequent filings that Norberg and Velkey found also were in chapter 13, and most took place within a year of the sample case. The Norberg and Velkey sample precedes the screening of repeat filers implemented by the 2005 bankruptcy bill, so it is possible -- although no foregone conclusion -- that the timing patterns could change.  Nonetheless, if the project sample is representative of all chapter 13 filers, the filing rates reported by the government (see Bob's recent post) have overstated the number of actual households in bankruptcy because each new filing gets a different case number. In any event, those who believe that chapter 13 is an ideal form of bankruptcy and thus praise districts that report higher proportions of chapter 13 cases should take a closer look.   

How Many People Filed Bankruptcy?

posted by Bob Lawless

It's bankruptcy filing statistics day! The Administrative Office of U.S. Courts ("AO") released new bankruptcy statistics today (August 28). On their face, these data show that there 155,583 bankruptcy filings for the three months ended June 30, 2006 (compared to 467,333 for the three months ended June 30, 2005). There were 1,164,815 1,484,570 total bankruptcy filings for the twelve months ended June 30, 2006 (compared to 1,196,212 1,637,254 for the twelve months ended June 30, 2005). Thus, the AO numbers show bankruptcy filings decreasing substantially in the second quarter of 2006 as compared to the second quarter of 2005. The numbers show a smaller decline when looking at a twelve-month period.

Any way one slices the data, bankruptcy filings clearly are down since the 2005 bankruptcy law. If one annualizes the most recent quarterly data, the filing rate would be 620,000 per year. Monthly data from the AO shows 55,000 filings in June 2006. Annualized, that would be a filing rate of 660,000 per year. That would be far less than the 1.6 million annual bankruptcy filings before the 2005 bankruptcy law.


The filing trend is moving upward. Monthly AO data show the following since October 2005 as captured in the table to the right. After the initial surge, bankruptcy filings increased steadily, but the growth appears to have stabilized. If the figures since March represent a plateau, then bankruptcy filings will annualize at somewhere around 40% of what they were before the 2005 bankruptcy law. CardWeb.com reports monthly filings increased to almost 63,000 in July 2006, the highest of any month since the 2005 bankruptcy law. Doing data analysis in "real time" can be problematic. Are the July 2006 filings a one-time blip or the beginning of a long-term increase to a new filing level?

Persons who follow bankruptcy policy closely will note that the twelve-month statistics overlap with the October 17, 2005, effective date of the new bankruptcy law. In the few weeks before the law became effective, filings surged. The AO reports that there were 630,000 filings in the month of October 2005, presumably most all of which occurred before October 17. The surge makes it difficult, if not impossible, to understand what the twelve month statistics mean. On the one hand, many persons who filed in October 2005 undoubtedly represent persons who accelerated a filing that would have occurred later in 2005 or in 2006. In contrast, some of these filings may have been filings that would not have occurred at all. There is no way to know how many filings were accelerated and how many were ones that would not have occurred.

Finally, I have to comment on the AO's quarterly figures showing that 3.1% of all filings were business filings for the most recent quarter. In The Myth of the Disappearing Business Bankruptcy, 93 Cal. L. Rev. 745 (2005), fellow Credit Slips blogger Elizabeth Warren and I reported data showing that about one in seven bankruptcy filers either was self-employed at the time of bankruptcy or recently before bankruptcy, data strongly suggestive that business filers are a much higher percentage of filings than the official AO data indicate. Although the newest AO figures seem low (3.1% of all filings), they are about 50% higher than the rate that the AO was reporting prior to the 2005 bankruptcy law (about 2.0% of all filings). The 2005 bankruptcy law likely was a bigger deterrent to consumer than business filers. Moreover, one strategy to avoid means testing under the 2005 bankruptcy law is to have the case classified as a business case, meaning debtors have more incentives to make sure the case is counted as a business filing.

UPDATE (9/21/2006): Mea culpa. I wrote down the chapter 7 numbers instead of the total filings for the twelve months ended June 30, 2005 and 2006. I have made corrections above. The main points are unchanged.

Small Business or Consumer?

posted by Bob Lawless

Leslie Eaton of the N.Y. Times today reports on the state of small business in New Orleans, one year after Hurricane Katrina. It is a great article, exploring the relationship of small business both to the social fabric and economic health of a community. In the article are stories about the financial decisions small-business owners have made in recovering from Katrina's devastation. A restaurateur expresses hope that he has not made a "foolish decision" by using all of his savings to reopen his restaurant. To cover losses stemming from months when her store was closed and slow sales since reopening, a shopkeeper has "mortgaged her house to the hilt" and borrowed from in-laws.

Whether these are reasonable risks or foolish decisions, these stories illustrate that "consumer" credit policy presents subtle and highly textured issues. First, I highlight "consumer" because one wonders how to classify the financial decisions of these business owners. Are these consumer debts or business debts? If the restaurateur now begins to rack up credit card debts for his daily living expenses because his savings are sunk into the business, how do we count that? Is the shopkeeper's home mortgage a business debt? For a significant segment of the public, their financial affairs are in a gray area between consumer and business. About one out of every seven bankruptcies, for example, is someone that is or recently was self-employed. Most every small-business owner's personal and business affairs are intertwined and interdependent.

One might wonder why these small-business do not incorporate or form a limited liability company, to separate business and personal affairs. The answer is that they may have done do so, but why does it matter if they have put their personal credit at risk to finance the business? Even if they have not, that can be a rational decision. With the press of all the other demands of a small business, the time and expense it takes to incorporate may not seem worth it if you have put your personal credit on the line anyway. Regardless of the fiction of legal separateness, small-business owners cannot financially walk away from a failed business.

When we think about "consumer" credit policy, we are thinking about different groups, and small-business owners comprise one of these groups. Often, however, consumer credit policy thinks about consumers monolithically. The monolithic image that often results is the irresponsible, overspending, unsophisticated consumer, and we end up with rules that are unsuitable for large portions of the public. An example is the new bankruptcy requirement that all individual filers undergo consumer credit counseling. If the New Orleans business owners mentioned in the N.Y. Times article later end up in bankruptcy court, query what credit counseling would tell them. Don't take business risks? The credit counseling requirement is just one example. Last year, I taught a seminar where looked at a host rules that looked great for consumers or looked great for big businesses but did not work well for small business owners.

Credit and bankruptcy laws directed at consumers will sweep in small-business owners. At that point, another law may come into play--the law of unintended consequences.

Turn Your Stucco into Sand

posted by Melissa Jacoby

I once received a pink flyer from a major bank that said in bold letters “Turn your stucco into sand,” while the inside of the flyer advertised home equity loans for purposes of taking beach vacations. This was supposed to be an enticement, but with this stucco-into-sand imagery, it seemed more like a warning about the consequences of using home equity, leaving people to make their own choices. I’m starting to wonder whether the bankruptcy system needs a similar warning. First, studies by Cheryl Long and Aparna Mathur suggest that there generally are longer-term home-owning consequences to filing for bankruptcy. Second, some homeowners file for bankruptcy primarily to save their homes from foreclosure -- presumably because their lenders/servicers will not agree to a workout with a borrower they believe cannot or will not sustain the mortgage, but possibly for other reasons. These filers use chapter 13 bankruptcy, which not only stops a foreclosure but allows them to cure a default over time over the objection of the lender/servicer. The administrative costs alone of chapter 13 to the homeowner probably add up to at least one or two mortgage payments, or, if homeownership is not to be, then a few months of rent in a new home. But I’ve seen no evidence that chapter 13 turns out to save homes in the long term, or that it is any more successful than other anti-foreclosure interventions. We’ll get help figuring this out once real estate finance experts recognize chapter 13 for what it is – a federal mortgagor protection device, albeit of unknown efficacy, that overrides many of the state real estate laws they have spent considerable time analyzing.

Chapter 11 as Federal Tax Collection?

posted by Melissa Jacoby

Debtor-creditor types tend to focus on private creditors in the business of extending credit or loaning money. Of course, debtor-creditor relationships vary considerably and accordingly have rather different dynamics. The findings in several empirical studies of chapter 11 should keep us mindful about the significant role of the Internal Revenue Service as a creditor in bankruptcy and how tax obligations affect the bankruptcy initiation decision for small businesses. In the recent working paper Dynamics of Large and Small Chapter 11 Cases: An Empirical Study, Douglas Baird, Arturo Bris, and Ning Zhu analyze chapter 11 cases in the Southern District of New York and the District of Arizona between 1995 and 2001. Baird and co-authors find vastly different patterns of general unsecured creditor payout between the big cases and the small cases (short version: general unsecured creditors get paid very little in the small cases). Although perhaps not their main result, they also report that “The need to resolve tax obligations is the engine that drives the typical small chapter 11 case.” (pp. 19-20). In in-depth research on chapter 11 cases in the Northern District of Illinois, Baird and Ed Morrison similarly have found the IRS in a prominent role. In their 2005 Columbia Law Review article Serial Entrepreneurship and Small Business Bankruptcy, Baird and Morrison suggest that the IRS essentially encourages entrepreneurs to put their struggling businesses into chapter 11, where it will renegotiate the entrepreneur’s personal liability.  So notwithstanding the special collection entitlements the government gives itself, it seems that the IRS prefers to encourage the initiation of a costly bankruptcy process, with other parties footing the bill. 

One Voice or Two?

posted by Elizabeth Warren

Newsweek ran a story this week about the scandals rocketing through the medical research field: a huge dispute over how much corporate sponsorship of research influences outcomes. The debate centers on the conflicts of interest that result from who paid for the research and whether that influences outcomes.  But there is an interesting side note that some scientists say is potentially more important: With sponsored research, the sponsor can simply fail to report the bad results. When the drug works—publish! When the drug doesn’t seem to have much effect—don’t publish! In effect, only the good outcomes (from the sponsor’s point of view) ever see daylight.

This relates directly to Katie Porter’s post about the need for empirical research that produces original data in a field such as credit research. There are tons of data collected about customers, defaults, debt-income ratios, the role of job loss, etc. But those data are proprietary, which means the owners (the creditors) don’t have to tell anything. If they have something to say that advances their interests, e.g., during the debates over the bankruptcy law, then they can produce those data. But everything else is secret.

Original data are very expensive to develop. Without them, however, Katie has it right: our understanding of credit will be completely one-sided. We will hear only one voice—and that will be the voice of those who make money from promoting a particular point of view.

Doctors and patients are starting to worry about the effects of bias in medical research. I hope the number of people who worry about biases in what we know about credit will expand as well.

Legal Empirical Research

posted by Katie Porter

Professor Richard Lempert at the University of Michigan Law School has just completed a week as a guest blogger at Empirical Legal Studies. He's written passionately about how he thinks legal scholars should use data, and the posts are definitely provocative.

I'm highlighting Lempert's postings here because each of my fellow CreditSlips bloggers do empirical research about credit and bankruptcy issues. We care about the quality of available data and about how data are used. Debates about data were a high profile and controversial part of the recent bankruptcy reform process, and I suspect this trend will continue. Lempert's last post raises a particularly important point about the difficulty and importance of collecting data, as opposed to using precoded publicly available data sets (Dept of Justice crime statistics, for example). He argues that collecting and preparing data is an important scholarly activity that deserves the respect and recognition of the legal academy. This point is particularly salient in the world of private law (including payment law, secured transactions, debtor-creditor law) in which the transactions are hidden from public view and much of the data are claimed as proprietary. Without painstaking original data collection, whether quantitative or qualitative, the realities of these important legal systems will not be understood.

Following the Money in Large Chapter 11 Cases

posted by Melissa Jacoby

In the new working paper "Rise of the Financial Advisors: An Empirical Study of the Division of Professional Fees in Large Bankruptcies," Lynn LoPucki and Joseph Doherty of UCLA report findings distinguishing patterns of compensation of lawyers and financial advisors using data from the extremely valuable Bankruptcy Research Database. According to this paper, approved financial advisor fees rose at a much faster rate (25% per year!) than lawyers' fees in the big cases during the study period (plans confirmed between 1998 and 2003).  Although the paper's other findings are independently interesting as well, they are especially intruiging when considered in connection with LoPucki's other recent work.  In the book Courting Failure, LoPucki hypothesized that chapter 11 outcomes (including a repeat filing rate of nearly half among the largest cases) are in part a function of court practices -- including the handling of fee applications -- designed to attract repeat players (many from New York) who help decide where the cases should be filed. LoPucki characterized the Delaware and New York courts as the major case competitors racing to the bottom.  Those looking for a more detailed summary and critiques of these aspects of Courting Failure should check out the Buffalo Law Review symposium on Courting Failure that was organized by Bill Whitford of the University of Wisconsin and should be on Westlaw and elsewhere imminently.

In Rise of the Financial Advisors, LoPucki and Doherty fill in a few more pieces of the puzzle regarding the New York and Delaware courts.  According to the working paper, debtor-in-possession (DIP) attorneys fees awarded by New York and Delaware courts were not statistically different from those awarded by other courts (p. 13).  And fees awarded to New York DIP attorneys were not significantly higher than those awarded to non-New York DIP attorneys.  But approved financial advisors' fees were generally higher in the Delaware court than in other courts (p. 19), and the New York court was "more likely than other courts to award fees to investment banks at very high hourly rates" (p. 29).  The paper indicates that the raw data will be posted here so that other researchers can independently evaluate.  Among other things, these findings could lead to a refinement or adjustment of LoPucki's theory regarding the pathways through which court practices may affect reorganization outcomes.

Cars in Bankruptcy

posted by Bob Lawless

Last night around the dinner table, I was saying how my day involved pulling 32 bankruptcy court files. "Guess," I said, "what was the average age of the car in which the debtor was claiming an exemption?" As my children rolled their eyes at another boring dinner conversation, my wife said "six months," and a guest offered "one year."

The answer is . . . .

Continue reading "Cars in Bankruptcy" »

Shame on You: The Stigma Associated with Personal Bankruptcy

posted by Debb Thorne

In the late 1980s, when the upsurge in bankruptcies had just begun and folks were searching for explanations, cries of a decline in stigma rang out. Interestingly, despite an essential absence of data from debtors themselves, this explanation was long-lived. Indeed, it was cited frequently during the Congressional debates that preceded BAPCPA. But as any sociologist would tell you, a decline in stigma as an explanation just doesn't make sense. Rates of bankruptcy filings are cyclical; stigma does not wax and wane in that way.

Just last month, Sociological Focus published my article, "Managing the Stigma of Personal Bankruptcy" (co-authored with Dr. Leon Anderson), in which I provide evidence that the stigma associated with filing is alive and well. For those unable to access the article, allow me to summarize. Although the sample was small, 95 percent of the debtors reported that they felt stigmatized by their bankruptcies. For example, a retired mail carrier stated: "I thought of it as a mark against my name . . . It was too embarrassing . . . I feel like I failed. You know, to go bankrupt, that's a sign of failure."

Not only did the debtors vocalize their feelings of stigma, but they also managed it in ways that are classic among other stigmatized groups. For example, they tried to conceal their bankruptcies, especially from their parents. One man, a father of two young boys, reacted in the following way when he was asked if his mom knew he had filed: "OH HELL NO!!! No, no, no, no way, no way. Nope. And she won't ever know. Never! Never. . . . She'd be like, 'Argh, you piece of shit. Why did you do that?" Debtors also practiced avoidance, whereby they avoided situations that might expose them. An example of this was described by a woman who said that she would never again take her kids to their family dentist because debts to him had been discharged. Rather than risk the potential embarrassment, she concluded that they would have to find a new dentist. Finally, the debtors went to great lengths to differentiate themselves from all those other "deadbeats" out there who supposedly abuse the system. They insisted that their own bankruptcies were bankruptcies "of necessity," not extravagance or abuse. And finally, three-quarters of them insisted that under no circumstances whatsoever would they set foot in bankruptcy court again. One man, who blamed his wife for their bankruptcy, said that he would divorce her first. Another said that he'd kill himself before he'd file again. This is probably an exaggeration, but it demonstrates the power of the stigma of bankruptcy.

I have no doubt that there are folks out there who file without feeling a shred of remorse or stigma. But my research suggests that they are the minority. For centuries, bankruptcy has been highly stigmatized. And, I would argue, it still is.

Update: We have opened the comments for this posting.

Empirical Evidence on Debt Trading

posted by Bob Lawless

Katie Porter's earlier post on debt trading (which has gotten some attention at The Conglomerate) reminded me of some poking around that I had been doing. Trading claims in bankruptcy is huge, in the billions of dollars per year. Although Katie Porter's post was in the context of consumer bankruptcy, bankruptcy claims trading can have decisive effects in huge corporate reorganizations. A corporate debtor in financial distress may find itself no longer dealing with a lender interested in a long-term relationship but with a so-called "vulture investor" interested only in maximizing short-term profits. Of course, without the ability to resell a loan, the lender might not have made the loan in the first place. None of this is to say that bankruptcy claims trading is either good or bad, but we don't know much about it.

I was trying to see if one could get data on bankruptcy claims trading and trading in distressed debt generally. (And by "I," I mean by my extremely capable faculty assistant.) It turns out you can get such data, if you have thousands of dollars to pay for expensive data subscription services. With the other things on my plate, I could not justify the time and money to invest in such a research project, but it strikes me as a fruitful area for investigation. Because we have so few data, it's an empirical project where the researcher would have something to say no matter what the data showed. Even a paper with descriptive data would make a huge contribution.

Bankruptcy Filings and Consumer Behavior

posted by Melissa Jacoby

When it comes to the bankruptcy filing rate, fiscal year 2006 (10/1/2005 onward) is turning out to be a very odd period. First, filings surged to historic heights in early October. Then, in the second quarter, filings dropped to the lowest rate since the mid-1980s. An intervening event was the mid-October effective date of an omnibus bankruptcy reform bill, the most extensive changes to the formal bankruptcy law in a generation. Most bankruptcy filers are individuals rather than business entities, so it appears that individuals became sensitive to changes to the Bankruptcy Code and may have altered their plans accordingly. Does this mean that individuals also can be expected to alter their borrowing behavior because of the bankruptcy law changes? Not so fast, say Professors Susan Block-Lieb and Ted Janger in an article just published in volume 84 of the Texas Law Review. 

Block-Lieb and Janger apply insights from behavioral decision research suggesting that individuals’ cognitive limitations, and not strategic behavior, provide an explanation of consumer overextension that is more consistent with consumer credit data. They also consider the possibility that lenders capitalize on these cognitive limitations. Whatever happens with the official bankruptcy filing rate reported by the government, Block-Lieb and Janger warn in their Texas article that “overleverage is here to stay.”

Missing GAO study?

posted by Katie Porter

The much-maligned Bankruptcy Abuse Prevention and Consumer Prevention Act (BAPCPA) may have a bright side for a certain subset of consumers--those who want better bankruptcy statistics, including the media, policy wonks, and academics. Much of the recent bankruptcy reform debate was a battle of numbers as illustrated by the debate about the misnamed and miscalculated $400 "bankruptcy tax." In a forthcoming University of Missouri symposium piece entitled "The Bright Side of BAPCPA," I take a look at the potential of the new law to shape the world of bankruptcy data collection and dissemination.

As part of my research, I learned that the GAO has missed a statutory deadline to produce a research report. Under section 230 of BAPCPA, the GAO was to produce a study on requiring trustees to report debtors to the Office of Child Support Enforcement. The report was due 270 days after BAPCPA's enactment, yet GAO officials confirmed that the study has not even begun. Has bankruptcy slipped to the bottom of the GAO's priority list now that Congress has taken it off the top of its agenda?

Apparently the GAO has made some progress on the reaffirmation study required by BAPCPA. Perhaps the best news in this regard is that they have interviewed Professors Michaela White and Marianne Culhane, authors of the leading academic study on reaffirmation. Hopefully, other government agencies doing post-BAPCPA research will seek collaborations with academics and other researchers. For our part as consumers of bankruptcy data, we should let the GAO and other agencies know that we care about the required reports and expect them to be timely and carefully executed.


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