Omnibus Update on (Declining) Bankruptcy Filing Rates

The June bankruptcy filing figures came out while I was away, and the July figures came out a little late. Thus, I have missed the past two monthly posts on the bankruptcy filing rate. Consider this an omnibus update on the pace of bankruptcy filings. As always, the data come courtesy of Epiq Systems.

The big picture is that U.S. bankruptcy filing rates continue to fall, both on a monthly and year-over-year basis. The daily bankruptcy filing rate was 5,484 in June and 5,505 in July. These figures represented year-over-year declines of 10.0% and 14.2% respectively. As compared to one year ago, bankruptcies over the first seven months of 2011 have fallen by 9%. The trend now suggests total annual filings for 2011 will be between 1.40 and 1.45 million, a decline of 7-10% from 2010 when 1.56 million bankruptcies were filed.

During the first seven months of 2011, the bankruptcy filing rate has declined in every state but one: Utah where bankruptcies are up 8%. Historically, Utah always had one of the highest filing rates in the country. Academic research has cited two reasons for Utah's surprisingly high filing rate: (1) relatively harsher wage garnishment laws which raises the cost of not filing bankruptcy and (2) higher-than-average family size which tends to put a family more at risk of financial distress. (See Lars Lefgren & Frank McIntyre, 2010. "Explaining the Puzzle of Cross-State Differences in Bankruptcy Filing Rates," Journal of Law & Economics, 52: 367-93 and Jean M. Lown & Barbara R. Rowe, 2003. "A Profile of Utah Consumer Bankruptcy Petitioners," Journal of Law & Family Studies, 5:113-30.) These findings explain why Utah will tend to have higher bankruptcy rates over time, But, unless there have been changes to the Utah debt collection laws like wage garnishment of which I am unaware, there is no reason why Utah's filing rate should have moved relative to the rest of the country over the past year.

In the other direction, some states have experienced above average declines in bankruptcy filing rates for the first seven months of the year. As compared to the national average of a 9% decline, bankruptcies are down particularly in Vermont (-31%), the District of Columbia (-24%), North Dakota (-22%), West Virginia (-22%), and Montana (-20%). These states (and D.C.) suggest a plausible guess for why Utah is an outlier in the other direction. The guess has nothing to do with policy-based reasons, but instead rests on a statistical artifact.

The variation of the mean of a sample (here the number of bankruptcies each month) is inversely proportional to the square root of the sample size (here the number of people in each state). In English, that means the larger a state's population, the less likely its bankruptcy filing rate will gyrate from month to month. Smaller states--like Vermont and Utah--are more likely to end up on the extremes than larger states. For example, it would have taken 7,272 fewer bankruptcy filings for Texas and its right-at-the-national-average decline of 9% to become the national leading decline of 31%. In the other direction, however, it would have taken only 234 more filings for Vermont's leading decline of 31% to become a middle-of-the-road decline of 9%. All things being equal, Vermont's filing rate will bounce around more than Texas's filing rate. A much better explanation of this idea appears in a wonderful article by Howard Wainer called "The Most Dangerous Equation" and that appeared in The American Scientist. (The original appears to be behind a pay wall, but Google will help you find copies available on the Internet.)

The mathematical facts about variance do not explain the entirety of reasons for the state-by-state differences for changes in the bankruptcy fiing rate. But, they are a big part of the reason. Rather than searching for deep socioeconomic explanations about why Utah or Vermont have ended up at the extremes at this particular point in time, the best explanation is just the math.