Most of What You Read about the Bankruptcy Filing Rate Is Wrong

A popular narrative is that bankruptcy filing rates are increasing dramatically. That is not true. If you want to know what is happening with the bankruptcy filing rate during covid-19, the best source is Ed Flynn's analyses over at the American Bankruptcy Institute (current analysis here with a historical archive here). Here some facts, using my own data as well as Flynn's very useful numbers:

1. Total bankruptcy filings have had some modest gains in recent weeks after falling off the cliff early in the crisis, but total filings remain down 33% on a year-over-year basis.
2. The number of chapter 11s filings has been very artificially inflated by counting affiliate filings. If one only counts the "parent" and "solo" filings, the chapter 11 rate actually declined in July!
3. The decline in chapter 13 filings has been much deeper than the decline in chapter 7 filings.

Before expanding on each of these points and like I wrote in an earlier post with the same theme, I am not Pollyannaish about the economy. Things are as bad as they seem. My plea is for accuracy. An understanding of whether and when people turn to the bankruptcy system to help them deal with their business or personal issues makes that system more effective.

First, let's look at total bankruptcy filings. According to data from Epiq Systems, they did rise in July 2020 as compared to June 2020. The increase was 1.0%, which is a number greater than zero. On a year-over-year basis, bankruptcy filings were down 33.4% in July 2020. (My numbers are always done on a per-business-day basis because the number of business days in a month affects the number of filings.) The big picture, as shown in the graph to the right, is that the bankruptcy filing rate has plummeted. There undoubtedly will continue to be increases in the filing rate as the rate works back to the baseline. We may even move above the baseline at some point and see increases. If I had to bet, I bet we will, but when we will and how big the increases will be are quite uncertain.

Next, let's consider the chapter 11 rate, which was the subject of a previous blog post. Let me try this again. When a corporate group with lots of subsidiaries files, each of the subsidiary has to file a separate chapter 11 petition. You have one economic unit filing bankruptcy but many chapter 11 filings. The total number of chapter 11s is easy to find but virtually worthless as a meaningful number.

Flynn has done the hard work of doing a meaningful chapter 11 count, coming up with the number of "parent" and "solo" filings after eliminating "child" filings, which are the affiliates of a parent. His analysis is weekly, so it does not match up exactly with the month of July. Here are my totals of Flynn's weekly numbers from June 29 - August 2:

 
Total 11s
"Solo" & "Parent" Cases
"Child" Cases

2019
529
360
169

2020
786
337
449

On the raw count, there is a 48.5% increase in chapter 11s during that time. That makes for a great headline and fits the narrative. But, if we count only "solo" cases with one filer plus only the "parent" filing of an affiliate group, chapter 11 filings actually declined by 6.4%.

As the table shows, there are far more "child"/affiliate filings in 2020. The reason for that is probably that large chapter 11s are up. Again, no one is contending that things are going great. Large chapter 11s will have more affiliates. Also, there have been quite a few large chapter 11 retail bankruptcies with lots of affiliates with individual properties of the larger corporate group.

And, there is the chapter 13 filing rate. What largely has escaped attention is that chapter 13s have especially declined. Again using Flynn's counts, chapter 7s declined by 16.5% on a year-over-year basis from June 29-August 2, and chapter 13s have declined by a whopping 51.3% over the same time period. The reasons for this are unclear. Perhaps the reason is the foreclosure moratorium on federally backed mortgage given that chapter 13 is seen as the "save the home" chapter. Perhaps chapter 13 is more discretionary than chapter 7 and is driven more by supply than demand. There is likely a blend of reasons.

I have little hope that we will see the end of simplistic analyses looking at overall bankruptcy filing rates as an indicator of economic conditions. The numbers are easy to find and easy to report. If you want a more careful analysis, follow Flynn's weekly reports. I will try to post more reckless analyses here.