Bankruptcy Filings Are Still Super Low--Don't Believe the Headl...

Headlines recently appeared in the usual places about a big March jump in bankruptcy filings. It is true that March 2021 total bankruptcy filings were 43,425 (according to the Epiq Systems data) and that was a 39.1% increase from February 2021. That looks like a big jump. Of course, March is a longer month, and in fact this March had four more business days than February--almost an entire extra work week. Calculating the filing rate per business day, the March 2021 filing rate was a 14.9% increase from February 2021.

That still feels notable, but let's be careful--very careful. Bankruptcy filings are at historically low levels. When any data series hits a trough and starts creeping back to an old base rate, the increases will feel really big although we are really only getting back to what we had experienced previously. The February filing rate was 1.13 filings per 1,000 persons, the lowest since January 2006 when bankruptcy filings fell to almost nothing after the surge to beat the effective date of the 2005 bankruptcy amendments. (To give you a sense of the surge, the October 2005 rate was 25.53 filings per 1,000 persons.)

We are nowhere near getting back to pre-Covid levels of the bankruptcy filing rate. The absolute level of bankruptcy filings remains really low. The 12-month moving average for bankruptcies per 1,000 persons is 1.39. That is the lowest number in my spreadsheet that goes back to 2004. Right before the pandemic, the figure was 2.05 filings per 1,000 persons. Consider also that, year-over-year, March 2021 was a 33.9% decline from March 2020. Bankruptcies are going to have to climb about another 40% to get back to pre-Covid levels, which were already relatively low.

Predictions? There remains a huge amount of uncertainty. The easy predictions is that bankruptcies will spike as people roll off mortgage forbearance and other relief comes to an end. That may be right, but there are other scenarios that seem as equally likely. People were paying down debt earlier in the pandemic, although that trend has stopped. Also, emergency bankruptcies to stop foreclosures happen, but they don't drive the bankruptcy filing rate. And, there is the quite prosaic possibility that people just want have enough money to pay the bankruptcy lawyer.

The biggest problem I have with predictions about what is going to happen is none of these predictions account for what happened last April when bankruptcies suddenly stopped. It was like flipping a switch. Bankruptcies dropped 40% overnight. We know that most bankruptcy filings are the result of a decision-making process that takes months if not more than a year. The decision to file bankruptcy is as much psychological and sociological as it is economic. What most likely happened is that suddenly people were not able to get to lawyers' offices to get that decision over the finish line or simply had more pressing matters. As the pandemic restrictions ease, these processes will ramp back up, and we may just end back at the base line we had.

But, I really don't know. Nobody knows. I do think an increase in the filing rate above the pre-Covid base rate is more likely than not, but there is more than the usual cone of uncertainty around this prediction. And, even if the "more likely than not" ends up being on the "likely" side of that, how much of an increase or how quickly it will occur is a complete crapshoot.