Bankruptcy Filing Rate Decline Is Historically Anomalous

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

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

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

The thin red line represents the daily filing rate in 2004, which is the filing rate before the 2005 changes to the bankruptcy law (i.e., BAPCPA). These legal changes do not seem to be the driving force in the decline as the filing rate briefly made it back to pre-2005 levels before declining in the most recent months. Whatever role BAPCPA might be playing, the trend suggests other causes are proximal.

Taking the long view, the recent decline in bankruptcy filing rates is unusual. The table to the right shows the bankruptcy filing rate per 1,000 persons since the U.S. has had a permanent bankruptcy law. (Again, a mouse click will bring up a larger version of the image.)

The first thing everyone notices is the huge ramp up in bankruptcy filings since 1950. Before rushing to judgment about shifts in generational attitudes toward debt default, it is important to keep in mind that the bankruptcy filing rate has risen almost in lockstep with the availability of consumer credit.

The point for this post  is to look at the declines. The dip in the middle part of the 2000's is dearth of eligibile filers after the rush to file in 2005 to beat the BAPCPA's effective date. Similarly, the drop in the mid 1970's was people waiting for the effective date of the Bankruptcy Reform Act of 1978, which created the current Bankruptcy Code. Putting those drops aside as quirks of legal history, the current decline since 2010 is obviously the greatest in terms of absolute numbers and is as steep as the historical quirks. As a percentage, the current decline is roughly equivalent to the drops in the war years of 1942 - 1946 and 1917 - 1919, drops there were the result of people being located elsewhere both physically and mentally rather than a shift in economic fundamentals. There are no other declines in the bankruptcy filing rate that have been as deep and sustained as the current decline.

The reasons for the current decline are most likely the result of the decreased consumer borrowing in the wake  of the 2007 financial, meaning less long-term debt appears now on household balance sheets. Also, as consumer credit has rebounded, households in precarious financial shape are finding it easier to borrow to stave off the day of reckoning. Other factors may be playing a smaller role. High unemployment means some persons may be putting off a bankruptcy filing until income starts coming in -- there is no sense filing bankruptcy if you will keep piling up debt afterwards. Also, the extension of the successive discharge bar from 6 to 8 years in 2005 may be causing a few refilers to wait until they are eligible for another discharge, although postponing refilers are too small a group to be explaining much of the decline. Mortgage foreclosure relief programs also may be servicing some persons who otherwise would have filed bankruptcy.

My instinct is that the bankruptcy filing rate decline does not represent a permanent decrease. Most of the factors I have cited above have started to reverse themselves or will soon come to an end. In the long run, the inexorable financial and demographic factors that drive bankruptcy filing rates will have their inevitable way toward pushing the rates back up.