No Surprise: Bankruptcy Filings Jump in February

Bankruptcy filings rose in February, but the spike in filings keeps with historical trends. According to data from Epiq Systems, there were over 104,000 bankruptcies in February 2012. Spread over the 20 business days during the month, the daily February filing rate was 5,221 as compared to only 4,399 in January. This is a rise of 18.7% in one month, a matter of concern perhaps at first glance but no surprise on further analysis.

It seemed time to update a chart I have used in the past. The graph to the right shows month-to-month changes in the daily U.S. bankruptcy filing rate from 2008 through 2011. Late winter and early spring always see a spike in bankruptcy filing rates -- the cylicality persists even in previous years.

The graphs also show an amazingly consistent trend where the daily bankruptcy filing rate slowly erodes throughout the year. A simple regression on each year implies that the daily filing rate erodes an average of around 1.3% each month from its high in the early part of the year. This downward trend over the course of the year is true even in years like 2009 and 2010 when the total annual bankruptcy rate increased as compared to the previous year. Thus, when bankruptcy filings go up on an annual basis, the bulk of the increase comes in the early part of the year.

Looking at where we have started, it looks more like 2012 will see another decline in bankruptcy filings. Instead of an increase, bankruptcy filings continue to go down. On a year-over-year basis, the February 2012 daily filing rate is a decline of 9.5%.

Although it is still early to put too much stock in such an analysis, extrapolating the filing rate for the first part of 2012 suggests that there will be just under 1.3 million total bankruptcy filings for the year. For comparison, in 2010, just two years ago, annual bankruptcy filings were 1.56 million.

The reason for the decline is two-fold. First, there was less consumer borrowing happening in 2008 and 2009, leaving less of an "inventory" of debt for bankruptcy discharge today. Second, consumers who are living close to the financial edge and who might be candidates for bankruptcy are finding it a little easy to come by more credit today than was true a year ago. This marginal extra bit of liquidity can be enough to stave off a bankruptcy filing. Looking at the long term -- two or three years out -- I would expect to see bankruptcy filing rates begin to move back up as consumers' balance sheets begin to fill back up with debt. Any contractions of the availability of consumer credit also are likely to lead to increases in the bankruptcy filing rate.