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US personal bankruptcies

This page is about US personal bankruptcies – primarily the quarterly totals. The main question is the overall health of balance sheets in the household sector.

This page is no longer maintained

Summary

26 May 2011

The large rise in personal bankruptcies since the beginning of 2006 has been due to a combination of (1) the credit crisis and (2) a rebound after a 2005 change in the law caused some temporary fluctuations. It seems now the peak is past and the level of bankruptcies is settling back down to a normal level.

A troubling longer term – 1991 to 2007 – demographic trend is a disproportionate increase in bankruptcies among older age groups, e.g. +433% in 75-84 year-olds, compared to younger, e.g. -64% in 18-24 year-olds; this is perhaps an indication of inadequate retirement savings.

Graph

26 May 2011. Data through the Q1 2011.

Click for larger image. Data are from the Administrative Office of the US Courts, via the American Bankruptcy Institute.

Highlights

Clippings below covered through 7 Aug 2008.

2005 change in US bankruptcy law (26 Jun 2010) The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, effective Oct 2005, was mainly intended to make it more difficult for individuals to file for Chapter 7 bankruptcy, under which most debts are forgiven, encouraging rather Chapter 13, under which more is repaid. This was in reaction to a long-term, five-fold increase in bankruptcies from 1980 to 2002.

The Act also made Chapter 11 business reorganizations more difficult and costly. For example, the court can no longer extend leases beyond 7 months without the consent of the lessor, vendors have stronger rights to reclaim goods already delivered or seek priority payment, and utilities may demand deposits in order to continue service.

As a result of the change in law, there was a peak in bankruptcy filings in 2005 and a drop in 2006. This exaggerated the growth in bankruptcies in the credit crisis of 2007 and following.


Change 1991 to 2007 as a function of age (5 Mar 2009) In a random sample of a few thousand Americans, the change in the bankruptcy filing rate, from 1991 to 2007, increased monotonically with age, from -64% in 18-24 year-olds to +433% in 75-84 year olds.


Longer term, pre-change (5 Mar 2009) Bankruptcies rose 5x 1980 to 2003, with the personal fraction rising from 87% to 98%.


Note on monthly numbers (26 Jun 2010) The monthly numbers are volatile, and can be distorted by the number of filing days in the month. If one is going to use them, it is best to look at filings per business day.


Relevant factors (26 Jun 2010) There is a clear correlation with both the general level of revolving debt and with the unemployment rate.

Covered and not covered

Quarterly data provide an adequate view of the trend and are covered here. Monthly data are quite noisy and are not usually covered.

Sources

See also

Clippings below were used in the construction of this page

Bankruptcies rose 5x 1980 to 2003; personal fraction 87% to 98%

Sep 2003. Minneapolis Fed.

http://www.minneapolisfed.org/pubs/fedgaz/03-09/cash.cfm

“Cash me out. Frank Jossi”

“Since 1980, bankruptcy filings have exploded. Last year bankruptcies grew to 1.6 million, about five times the 1980 figure. … In 1980, 87 percent of the nation's 331,264 bankruptcies were filed by consumers. By 2002, that figure had grown to 98 percent.”

Long-term increase, and relation to debt and unemployment

Jun 2006. Federal Reserve report to Congress.

www.federalreserve.gov/boarddocs/rptcongress/bankruptcy/bankruptcybillstudy200606.pdf

“Report to the Congress on Practices of the Consumer Credit Industry in Soliciting and Extending Credit and their Effects on Consumer Debt and Insolvency”

“this review finds that as a matter of industry practice, market discipline, and banking agency supervision and enforcement, credit card issuers do not solicit customers or extend credit to them indiscriminately or without assessing their ability to repay debt. Currently, the principal means of solicitation is direct mail, the bulk of which is guided by careful prescreening of potential recipients regarding their financial condition and history. And all applications received are reviewed for risk factors. Thus, lenders analyze consumer financial behavior carefully before offering credit, and they consider consumers’ ability and willingness to pay in making decisions about extensions of credit.”

Limitations of AO bankruptcy data

13 May 2008. Credit Slips.

http://www.creditslips.org/creditslips/2008/05/why-i-use-aacer.html#tp

“Why I Use AACER's Filing Statistics. by Bob Lawless”

“Recently, Jason Kilborn, a law professor at Chicago's John Marshall Law School, posted a comment asking why AACER's filing statistics were lower than the ones provided by the Administrative Office of U.S. Courts (AO). For example, AACER reported 826,665 bankruptcy filings in the 2007 calendar year, about 2.9% lower than the 850,912 filings reported by the AO.

The differences seem to stem from the AO's including a old but reopened bankruptcy case in its count of bankruptcy filings where AACER's data only counts new filings. The AO data also appear to count transferred cases. Thus, for new filings, AACER's statistics are the ones to use. Besides, as I have mentioned previously, the AO's data come out woefully late, as much as three months after the fact. AACER is able to provide timely data. …

why should should anyone else care? First, if you are a policymaker or someone else who uses the bankruptcy filing data as some measure of economic health for the United States, you should care that the AO data overstate the true number of new bankruptcy filings by a few percentage points. This is a good lesson in being careful with the data one uses. The AO's primary mission is to provide data for the federal court system, where information about reopened and transferred cases may be important to judicial administration and workload measurements. Second, if those of us who use the bankruptcy filing data for time series analysis, one might worry about how long the AO has counted reopened and transferred cases in their bankruptcy filing data. If the data measurement was changed during the period of the time series analysis, we would have a discontinuous time series.”

[It would be nice to have access to the better data, but the AO data is probably fine for judging the overall trend.]

Bankruptcy demographics

Jun 2008. AARP report.

http://assets.aarp.org/rgcenter/consume/2008_11_debt.pdf

“Generations of Struggle. Deborah Thorne (Ohio University), Elizabeth Warren (Harvard Law School), Teresa A. Sullivan (University of Michigan)”

“We have analyzed the age distribution of bankruptcy filers over the past 16 years … The data reported here come from three major bankruptcy studies: The 1991 Consumer Bankruptcy Project, the 2001 Consumer Bankruptcy Project, and the 2007 Consumer Bankruptcy Project. The 1991 CBP age data were collected from 2,400 debtors in 16 districts from five states: California, Illinois, Pennsylvania, Tennessee, and Texas. The 2001 CBP data came from 1,247 debtors in five districts in the same five states. This is the first report of data from the 2007 Consumer Bankruptcy Project. … we have our first national random sample of debtors.In early 2007, we mailed questionnaires to 5,251 Americans who had filed for bankruptcy within the previous month. We received 2,435 responses. With a response rate of about 50 percent, we have increased confidence in the accuracy of efforts to generalize from our sample to the entire nation. To measure age differences among those who file for bankruptcy, we count all debtors, whether they filed for bankruptcy singly or as part of a married couple in a joint petition. In 2007, 29 percent of bankruptcy cases were joint petitions, declaring the bankruptcy of both husband and wife. This means that the 783,823 noncommercial cases filed that year represent about 1,011,132 adults who declared bankruptcy.”

Monthly numbers should be normalized for working days

7 Aug 2008. CreditSlips

http://www.creditslips.org/creditslips/2008/08/bankruptcy-fili.html

“Bankruptcy Filings Jump in July, Highest Since 2005 Law. Bob Lawless”

“According to the latest figures from Automated Access to Court Electronic Records (AACER), there were 96,355 filings in July 2008 for a daily filing rate, spread over 22 business days, of 4,380. That is a 2.4% jump from the previous month and a 33.2% increase from the same time period one year ago. Headline mongers can make the monthly jump look even bigger. In terms of raw numbers, July bankruptcies were up 7.3% from the previous month. That calculation, however, ignores the fact that July had one more business day, and when comparing monthly filing numbers, they are very sensitive to the number of business days in a given month. Careful reporting will focus on the daily filing rate rather than the total number of filings for the month of July. Although I think it is wiser to look at long-term trends rather than monthly changes in the U.S. bankruptcy filing rate, the July figures surprised me. Since the 2005 bankruptcy law had gone into effect and even before that, the summer months had seen a relative plateau for bankruptcy filings with few monthly increases. The July figures buck that trend and are a rare summer increase in the U.S. bankruptcy filing rate.”

Discussion

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