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Why Such a Large Drop In Bankruptcy Filings?

As the year closes out, it looks like the final tally for consumer bankruptcy filings for 2006 (the first full post-BAPCPA year) will be about 600,000 or so. Last year the figure was 2 million (in large part because of the pre-BAPCPA spike) and in 2004 it was about 1.5 million. So there has been a drop of roughly 60% from the prior levels.

Moreover, after the post-BAPCPA trough at the end of last year and the beginning of 2006, week-to-week filings have been virtually constant since April, with perhaps a very slight upward trend at most.

I'd be interested in hearing from readers, and bankruptcy practitioners in particular, as to what your experiences suggest about what is going on. The big question, of course, is whether there will be a permanent drop in the trend line on filings over the pre-BAPCPA levels.

Two possible hypotheses that I have heard don't seem to be consistent with the data that I have seen:

1. BAPCPA Hangover: One theory is that the system is still suffering from a BAPCPA hangover, and that everyone who was thinking of filing filed last October before the law went into affect. But this is hard to square with the observation that filing levels stabilized in the spring and have not subsequently bounced back to anything like their preexisting levels. Moreover, even if you add in all of the extraordinary pre-BAPCPA surge in filings (500,000) into 2006, you are still looking at a substantial drop from 2004 or BAPCPA-adjusted 2005.

2. Increased Cost and Complexity: Another theory is that increased cost and complexity of the system is simply making it more difficult for needy filers to get access to bankruptcy even though they need it. But if this is the case, then one would expect to see a spike in "informal bankruptcies," i.e., defaults by struggling consumers who need to file bankruptcy but are unable to do so for some reason. Yet looking at the Federal Reserve's data on delinquency rates and charge offs on consumer loans, there appears to be no increase in delinquencies on consumer loans, as one would expect were struggling consumers unable to get access to bankruptcy, and a drop in charge offs. FDIC data indicates that total chargeoffs appear to have fallen dramatically as well. So this data seems to be inconistent with the hypothesis that there are many struggling consumers out there who need bankruptcy relief but are unable to afford or navigate the new system.

This absence of an upward trend in delinquencies is especially striking given that there are othe forces that would have been expected to manifest themselves in higher delinquency rates regardless of bankruptcy. First, as a result of Fed policy, there was a general upward trend in interest rates for consumers as compared to the past few years. As adjustable rate mortgages and other variable rate consumer loans such as home equity loans and other consumer loans took this into account one would have expected a rise in deliquencies. Second, in January new regulations were adopted that increased the mandatory minimum payment on credit cards. That too should have exerted upward pressure on consumer credit defaults, especially on credit cards. Yet there is still no upward spike.

A third hypothesis is that despite some hiccups, BAPCPA has been working largely as Congress intended so far in diverting various categories of debtors out of bankruptcy while preserving relief for those who need it.

I'd like to hear from you in the Comments and on two points in particular. First, from debtor and creditor pracitioners as to what you think is causing the drop in the filings and in particular how the composition of filers has changed (if at all). Second, I'd be interested in hearing any additional hypotheses other than the three I have described, as to what is going on.

Please keep comments civil and substantive. I am hoping to collect experiences here as a centralized repository for scholars that can be used to generate testable hypotheses about what is going on out there.

Update:

To clarify my bleg just a bit--I'm also looking for impressions as to whether particular provisions of BAPCPA have had an especially strong "bite." For instance, are we seeing a dramatic drop in repeat filings? Cases with suspected fraud? High-income filers? Cases with auto cramdowns (although it appears that chatper 13 filings have risen as a percentage of cases)?

Related Posts (on one page):

  1. Foreclosures:
  2. Why Such a Large Drop In Bankruptcy Filings?
B. Buchanan (mail):
Could the strong economy have a factor? With more and better jobs available there is a decreased need for bankrupcies. The only way to test the hypothesus is to wait for the next recession and see if they go up.
12.20.2006 8:37am
George Liebmann (mail) (www):
I have been a bankruptcy trustee for 25 years. In my view, the caseload change is driven by the fact that tha
law changes, by requiring individual treatment of cases, have rendered consumer bankruptcies unprofitable for 'mass production' law practices, and have correspondingly reduced lawyer advertising, the chief driver of the consumer bankruptcy boom. Debtors who once would have received uncontested discharges now continue to carry debts, producing some increased collections for creditors which have thus far offset the increased defaults which one might have expected from lower interest rates.
12.20.2006 8:40am
Jim C B (mail) (www):
At least in the Dallas area, the economy is generally improving and at least consulting rates are greatly increasing, back towards where they were in 2001. There seems to be a problem with the housing market and people having to sell or default from transactions made in the last five years. A great deal of damage was done from early 2001 up to 2005, so it may take a while for that to happen. At least, if this is a general trend, with rising incomes, that would remove many financial pressures that would otherwise push people into bankruptcy.
12.20.2006 8:41am
David Finberg (mail):
Of course, because data really is the plural of anecdote.
12.20.2006 8:51am
Glenn W. Bowen (mail):
like george liebman said.

the rules were changed making it more difficult to default.
12.20.2006 9:20am
tefta2 (mail):
Blame Bush.
12.20.2006 9:21am
sammy:
It seems to me like the third hypothesis is a quite viable one, although i'm not a bankruptcy practitioner. In line with Richard Hynes' insightful analysis in BANKRUPTCY AND STATE COLLECTIONS: THE CASE OF THE MISSING GARNISHMENTS, 91 Cornell L. Rev. 603 (2006), it might behoove bankruptcy scholars to look at whether the rates of garnishment in state proceedings have similarly fallen dramatically in the past year to better understand what the sharp fall in the number of bankruptcy filings means.
12.20.2006 10:24am
Henry679 (mail):
This absence of an upward trend in delinquencies is especially striking given that there are othe forces that would have been expected to manifest themselves in higher delinquency rates regardless of bankruptcy. First, as a result of Fed policy, there was a general upward trend in interest rates for consumers as compared to the past few years. As adjustable rate mortgages and other variable rate consumer loans such as home equity loans and other consumer loans took this into account one would have expected a rise in deliquencies.


Haven't we seen just such a rise?




Money quote:

"Nationwide, nearly 877,000 homeowners were in foreclosure so far this year, up 37 percent from the 640,454 who filed last year, ForeclosureS.com said."
12.20.2006 10:53am
Henry679 (mail):
Sorry, the link got left out. Cut and paste this into your browser:

http://tinyurl.com/y8lla7
12.20.2006 10:56am
Zywicki (mail):
Henry679:
Thanks for your excellent question--I went ahead and did a new post to discuss it a bit.
12.20.2006 11:43am
David Muellenhoff (mail):
I act as in-house counsel for a couple of nonprofit credit counseling agencies, and I know that both of them decided against registering with the EOUST to be able to provide pre-bankruptcy counseling because it looked like way too much trouble for the expected customer volume. Since BAPCPA requires most filers to go through credit counseling, if relatively few such agencies have registered with EOUST, that might constitute a practical bottleneck impeding filers from filing.
12.20.2006 2:19pm
John T (mail):
I would not discount the problem of consumer confusion. Quite a few people erroneously believe that the law was changed to make it impossible for them to file for bankruptcy-- partially as a result of scare stories by bill opponents. (Even though the law, as I understand it, primarily affects those with a household income above the median.) It's possible that people are struggling harder to avoid having to file bankruptcy partially because of this.
12.20.2006 2:58pm
Tracy Coyle (mail) (www):
AS one of your outspoken critics and an employee of a consumer bankruptcy practice, I'd be happy to add some data for your mine.

I would argue a little with the assumption that only about 500,000 of last years filings were BARF induced. As there were over 150,000 cases filed in September (well about the 30-40k average of previous years) and over 600,000 in October. It is likely that about 650k cases were BARF induced. It does not make much difference but adding 650,000 to the filed 600,000 puts us close to 1,250,000 (just a bit above 2000 when 1,262,102 cases were filed). 2004 showed a 2.6% drop in filings over 2003, what would have been the number of filings if that trend had continued with the continuing good economy.

However, you are looking for insight into what is actually going on. Filings in this district (WI W) were down about 65% this year from 2003/2004 average. The number of Chapter 13s as a percentage of cases filed increased 50% from 12% to 18%. Our primary practice has always been chapter 13. We help people in foreclosure (will check your foreclosure post after this). And foreclosures are up over 50% in this area in the last year. We are seeing a slight rebound in filings for Chapter 13 in the last few months but nothing compared to the huge number of people that are losing their homes.

Debtors are less logical in their debt management than some people give them credit for. It is not unusual to see someone that has raided their 401K to pay off credit cards and then get behind on their mortgage. Given the number of foreclosures, we might be seeing people paying their credit cards (to keep gas in the car and food on the table - I am not saying that is good) at the risk of their mortgages.

Your position that default rates are not rising is erroneous:

Defaults on adjustable-rate mortgages made this year to the riskiest borrowers and packaged into bonds surged 25% in October to the highest level for new loans in five years, Friedman Billings Ramsey Group Inc. said.

The percentage of so-called sub-prime loans delinquent by 90 days or more, in foreclosure or turned into repossessed properties, rose to 2.52% from 2.01% in September, the Arlington, Va.-based investment bank said last month. The rate for loans from last year gained 9.7% to 5.79%, the worst performance of any year's loans of the same age since 2002.


Still, it is clear that the number of potential bankruptcies is lower than you would expect. It is clear from the people we are seeing that the pre-BARF advertising 'taught' consumers bankruptcy was no longer available. Many of our clients were surprised to learn they 'qualified' for bankruptcy. We are also seeing a larger than average number of people that can not afford the increased fees we (and the court) charge. Pro se filings are up slightly in this district but a higher percentage of them are getting dismissed for some deficiency or another.

John T is right, consumers believe bankruptcy is no longer an option. For those 20-30% below the median income, they are right. The costs are too high. For those at the or near the median +/- it is an iffy situation. We have a handful of clients in Chapter 13s but below the median income. We have several clients above the median but DMI is negative and they filed Chapter 7.

I will call attention to a post on my blog concerning bankruptcy fraud (near the end). We always contended that your claim of 10% of cases had fraud to be...overblown is too light a word.
12.20.2006 6:20pm
DRJ (mail):
My experiences and observations - as a former bankruptcy professional who still has contact with what's happening now - are similar to much of what Tracy Coyle has written. Here are some things I've noticed:

1. Filings are substantially depressed in our District compared to prior years.

2. Bankruptcy professionals in our area had a very hard time grasping the intricacies of the new laws. As a result, they had problems counseling debtors and filing cases that could successfully work their way through the system. Along with fewer cases filed, I've noticed there are more dismissals and overall problems with the cases that are filed.

3. Because the case filings declined, many bankruptcy professionals tried to reduce expenses to offset the decline in revenues. Most did this by cutting out advertising. The only lawyers in our area who are getting traffic from potential clients and are filing cases are the ones who still advertise.

4. Because advertising has significantly declined, more potential bankruptcy debtors are apparently unaware of the option of bankruptcy and how it might help them. In other words, not only are bankruptcy professionals unsure of how the new laws work, debtors are uncertain as well. No surprise there.

5. Cases seem to lurch through the system, apparently because the kinks aren't ironed out yet. Hearings take longer than they used to, there is more paperwork, and some potential debtors balk at the level of information and documentation they have to produce (especially tax returns) to file their case. It doesn't seem to be a matter of hiding anything as much as how complicated the process is and the fact that some attorneys are struggling as much as their clients are. Plus, many debtors aren't good record-keepers to start with.

6. Some bankruptcy professionals have resorted to filing only "easy" Chapter 7 cases (debtors below the minimum income levels) in order to avoid the pitfalls and problems of filing the more complicated Chapter 13 cases.

Overall, the problems seems to rest with the bankruptcy bar failing to come to grips with the new laws. It's been difficult to handle the new laws without hands-on practice but "learning the hard way" is also hard on the clients. In my experience, those lawyers that manage to get a handle on the new laws and advertise aggressively are filing cases at or near the pre-October 2004 levels.
12.20.2006 7:53pm
DRJ (mail):
By the way, I won't be surprised if we see more Chapter 13 bankruptcies filed compared to Chapter 7 cases. In my opinion, the new laws are designed to push debtors into Chapter 13 repayment plans.
12.20.2006 9:02pm
jbs1974 (mail):
As a creditor's attorney in consumer bankruptcy matters, I'd like to add my two cents.

The new law has created a lot of concern among debtor's counsel about multiple filing issues. So, for instance, attorney's fees are higher on multiple filers in cases where motions have to be filed to extend the automatic stay because of the additional work involved.

For the most part, however, motions to extend the automatic stay in this jurisdiction (E. PA.) are uncontested. If this trend continues, multiple filers will probably not feel as discouraged to try again.

Moreover, there have been some decisions regarding the motions to extend that may further diminish the impact of the revisions to the automatic stay provisions. First, we have one decision that says if the stay is not extended after 30 days, the stay is lifted as to the debtor's property, but not to property of the bankruptcy estate. This distinction is pretty important, as it still stays foreclosures. Whether higher courts will agree and how this effects debtor behavior in the future remains to be seen.

Also, the termination of the stay after 30 days does not lift the stay with respect to co-debtors (co-obligors). This means another motion even if the stay terminates and a lot of creditor clients would rather make a deal than fight a motion to extend plus a motion for relief against the co-debtor.

As we learn the contours of the law, we may find more than enough wiggle room to erode the bite of the multiple filer provisions.
12.21.2006 11:00am
Scott B. Riddle (mail) (www):
I will cop-out to some extent and say "all of the above." The reality is that virtually everyone still qualifies for some chapter, and most people who qualified for Chapter 7 prior to the BAPCPA still qualify for Chapter 7. I have no doubt that the October 2005 rush included many people who would have filed later, and the media (and marketers of non-bankruptcy alternatives) has done a great job in pushing the idea that many consumers do not qualify for bankrupcty. Of course, some people will not get the benefit of the stay, and may pay higher fees, but I can't imagine that is a large number of people, relatively speaking. Access, to good legal advice, qualified lawyers, or cash for fees, is a big hurdle. While I would not dispute the idea of changes to Bankruptcy law, the BAPCPA, as mentioned by numerous judges and most scholars, is an absolute mess. Comments like "I would not change a thing" are either paid for, or simply a joke that takes away virtually all credibility.
12.21.2006 11:15am
Houston Lawyer:
The filings turned out by bankruptcy mills were a joke under the old law. This was true even for Chapter 13. I had the joy of reading my ex-wife's Chapter 13 filings. It is clear to me that no one in the system was looking out for unsecured creditors.

I guess this should be expected, since the cost of pursuing any one insolvent creditor based upon a clearly deficient listing of assets is surely not worth it.
12.21.2006 4:41pm