A Coming Consumer Bankruptcy Tsunami, Wave, or Ripple?

With the Covid-19 pandemic, there has been a lot of talk about a coming surge of consumer bankruptcy filings. In the very short-term, however, bankruptcy filing numbers are down. According to data from Epiq Systems, daily bankruptcy filings declined 18.4% in March 2020 on a year-over-year basis. March 2020 filings were 62,847 as compared to 73,521 in March 2019 but were spread out over one more business day (and hence had an even lower daily filing rate).

The downward trend appears to have continued in April. I say "appear to" because the numbers are down so much that I wonder whether my computations are accurate. Immediate national bankruptcy filing numbers are hard to assemble. Using docket searches on Bloomberg Law that produced all of the bankruptcy cases filed on particular dates, I got the following national bankruptcy filing counts in 2020 as compared to 2019

 
2019
2020
decline

last seven days of March
21,656
15,096
-30.3%

first seven days of April
14,886
7,432
-50.1%

second seven days of April
15,602
7,225
-53.7%

If anyone has better data or can confirm these numbers, please leave a comment. Even if these numbers are not spot on, I am confident enough to say there have been big drops in consumer bankruptcy filings the first two weeks in April.

Obviously, these numbers should not be taken as portents that Covid-19 will lead to a decline in the bankruptcy filing rates. Much more likely, they reflect the shutdown of ordinary life. It is far more difficult for clients to get to their lawyers and for lawyers to get to their offices and the courts. As helpful as they are, electronic solutions like telephonic court hearings and 341 meetings are not full substitutes. Perhaps even most significantly, as the crisis unfolds people do not have the money to pay a bankruptcy lawyer.

And there is a larger point to the caution against extrapolating from the short downward trend. Any model predicting consumer bankruptcy filings in this crisis is wrong. Statistical models use past correlations to extrapolate to the future. None of these models have data that include the sort of societal disruptions we are experiencing.

Given the scale of the disruptions, it is difficult to imagine scenarios where bankruptcy filings do not increase. But, there are numerous reasons to wonder about the size of the increase and the time over which it will occur. Federal or state moratoria on debt collections, evictions, and foreclosures may alleviate immediate pressures that cause many consumers to consider bankruptcy. Evidence suggests most people struggle financially for two to five years before filing bankruptcy. Financial problems that begin now may not end up in the bankruptcy court for quite a while. Also, historically, rising consumer debt predicts bankruptcy filings, which makes sense given that bankruptcy is a legal proceeding that forgives past debts. Massive job losses might cause consumers to lose access to credit, meaning there will be less debt on household balance sheets and less demand for bankruptcy filing.

In writing this post, I fear being misinterpreted. In this pandemic, I am not at all sanguine about the financial state of U.S. consumers. Much, much more needs to be done than what has happened to date. This post addresses a very specific thing and that is the rate at which consumers will take the legal step of a formal bankruptcy filing. There can be a tendency to conflate household financial distress with formal bankruptcy. The two are not synonymous. Many more households are financially distressed than file bankruptcy. All I am suggesting here is that the bankruptcy filing rate might not rise proportionally with household financial distress.

Common sense says consumer bankruptcy filing rates will go up. The amount of the increase and the shape of the curve are uncertain. So we can have a consumer bankruptcy system that is ready to handle an increase, how quickly and how much filings will ramp up are important to know. It is just far too early to speak definitively.