Bankruptcy Filing Rate Is Lowest Since Bankruptcy Code's Enactm...

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

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

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

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

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

Why Are Bankruptcy Rates So Low?--Some Hypotheses

First, Some Global Observations

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

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

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

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

The Hypotheses

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

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

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

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

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

Where Might We Be Headed

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

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

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