Consumer Filings Trends and Indicators Part I
Part I of this article looks at consumer bankruptcy filing rates and attempts to identify some trends and economic indicators that might predict those filing rates. The $64,000 question (which, adjusted for inflation, today would be the "$484,537 question") is, what causes consumer bankruptcy? Answering that question with any degree of confidence probably is impossible (or might win me the Nobel Prize for economics if I were able to answer it). Here one must be wary of the causation-correlation trap. What we can do to skirt that trap is to consider the question of what economic indicators are correlated to, and thus may be able to predict, consumer bankruptcy filings.
While several studies examined these questions prior to the passage of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA), there remains considerable uncertainty and debate over what economic factors correlate to consumer bankruptcy. This is the first study that takes into account the impact of BAPCPA, both in anticipation of and in the aftermath of its effective date.
Filing Rates (1980-2006)
It is common knowledge that bankruptcy filing rates rose dramatically in the quarter century following the effective date of the Bankruptcy Reform Act of 1978. On the eve of the Oct. 17, 2005 effective date of BAPCPA, nonbusiness bankruptcy filings spiked up sharply. However, in the immediate aftermath of the effective date of BAPCPA, bankruptcy filing rates fell drastically. These filing trends are shown by Chart 1.
However, the picture of nonbusiness bankruptcy filings is much less dramatic when only the past decade is used, as seen in Chart 2.
As Chart 1 shows, 1997 was the beginning of the "modern" era of consistently high nonbusiness bankruptcy filings. That was the first year of more than one million nonbusiness bankruptcy filings, with 1,263,006 such filings—up over 25 percent from the prior year's previous high of 989,172. This also was the first year that nonbusiness filings surpassed 4.0 per 1,000 population, reaching 4.717 per 1,000.
Since 1997, however, while nonbusiness filings still have grown, they have done so at a much more modest pace. Where total nonbusiness filings more than quadrupled from 1985-97 (from under 300,000 to 1.26 million), they increased a total of only 15 percent from 1997 to 2006 (from 1.26 million to 1.45 million). Even more telling, the increase in filings per 1,000 population has increased only three percent total from 1997 to 2006 from 4.717 to 4.872—a minuscule annual growth rate in per capita filings of barely three-tenths of one percent. By contrast, from 1985-97 the filing rate per 1,000 went from 1.252 to 4.717. In the past decade, total nonbusiness filings have ranged from a low of 1,240,012 (in 2000) to a high of 1,613,097 (in 2003), and in the year ending June 30, 2006, fell in the middle of that range, at 1,453,008. Per capita filings in the past decade have ranged from a low of 4.394 per 1,000 (in 2000) to a high of 5.546 (in 2003), and in 2006 were in the lower part of that range, at 4.872 per 1,000 people.
The Impact of BAPCPA on Filing Rates
The immediate impact of BAPCPA on filing rates can be seen more readily by examining quarterly filings, as seen in Chart 3. The spike in filings after passage of BAPCPA in April 2005 and before the Oct. 17, 2005, effective date, and the fall-off thereafter, are starkly evident.
In the two full quarters following BAPCPA's effective date, nonbusiness filings have totaled 263,660, a per-quarter average of just 131,830—barely a third of the pre-BAPCPA enactment average of 386,464. However, when all of the "aberrant" quarters (those following BAPCPA's enactment and preceding and following the effective date of BAPCPA) are averaged, we see an "average" quarter of 381,883 filings—almost identical to (98.8%) the prior 17-quarter average of 386,464—but of course with a much higher standard deviation. This data suggests the possibility that the post-BAPCPA plummet in filings may have just about played out—unless fundamental changes have occurred. As Part II will show in next month's issue, that does not appear to be the case.
How does the picture look when non-business filings are broken down by chapter (7 and 13)? As Chart 4 (p. 60) demonstrates, it is evident that both the pre-BAPCPA-effective-date spike and the post-BAPCPA fall-off in filings were much more drastic in chapter 7 than in chapter 13. This of course is hardly surprising, since the reality—and the perception—was that BAPCPA was making it much more difficult for consumer debtors to obtain chapter 7 relief. Little wonder, then, that anyone who was considering filing chapter 7 would rush to the courthouse to file before BAPCPA supposedly brought down the curtain of ready chapter 7 access. For more than four years, from the start of 2001 through the first quarter of 2005 (i.e., just before BAPCPA was enacted on April 20, 2005), chapter 7 filings were remarkably constant, averaging 275,297 per quarter, with a very modest deviation. In the three reporting-period quarters in which consumer debtors had a chance to file post-BAPCPA enactment and pre-effective date, by comparison, chapter 7 filings averaged 446,503—62 percent higher than the previous 17 quarters. It is little wonder, then, that the total chapter 7 nonbusiness filings for the two quarters following the BAPCPA effective date were 154,924, or an average of 77,462 per quarter—just 28 percent of the one-quarter average of 275,297 for the 17 quarters preceding BAPCPA's enactment. If the deviant five pre- and post-BAPCPA quarters are averaged, however, we see a quarterly average of 298,886—slightly higher than the preceding 275,297 average, but only by 8.5 percent. While the consideration above of all nonbusiness filings indicated that the run of below-average filings might be largely over, this data on chapter 7 filings suggests the possibility that chapter 7 filings might remain slightly below historic (viz., pre-BAPCPA enactment) levels for another quarter—again, unless some fundamental change has occurred.
In looking more closely at chapter 13 filing trends, the first fact of note is that (unlike chapter 7 filings, which spiked) there was virtually no change at all in chapter 13 nonbusiness filings in the time period after enactment of BAPCPA in April 2005 up to the effective date in October 2005. This "nonspike" can be seen in Chart 4. Chapter 13 nonbusiness filings for the quarters ending June 2005 and September 2005 were 102,107 and 109,833, respectively, an average of 105,925. For the 17 quarters from March 2001 through March 2005 (the pre-BAPCPA world), the chapter 13 nonbusiness filing average was 110,937—very close to (just 4.7 percent higher than) the post-enactment, pre-effective-date average of 105,925 for chapter 13 nonbusiness filings. Indeed, even in the quarter ending December 2005, which included 2 1/2 months following the Oct. 17 effective date, chapter 13 nonbusiness filings were down only slightly, to 93,714.
It has only been in 2006 that chapter 13 filings have gone down significantly. For the two quarters ending March 2006 and June 2006, chapter 13 nonbusiness filings were 49,314 and 59,170, respectively, an average of 54,242—almost exactly half of the 110,937 quarterly average for the pre-BAPCPA world. However, the drop in chapter 13 filings has been much less than in chapter 7, where the post-BAPCPA drop to date has been to barely a quarter of historic levels. If the five quarters beginning with BAPCPA's enactment are examined, we see an average quarterly chapter 13 filing rate of 82,809, approximately three-fourths of the prior average of 110,937.
Looking at this data, one can speculate about some possible explanations for the recent trends in the chapter 13 filing rate. As noted above, the dramatic jump in chapter 7 is explainable largely by consumer debtors trying to take advantage of the old, more favorable law. So, too, it is likely that a substantial number of putative chapter 13 filers (i.e., those who absent the enactment of BAPCPA might have filed chapter 13 some time from the fourth quarter of 2005 on) moved up their bankruptcy filings to beat BAPCPA's effective date. While most of the press has gone to the "tough new chapter 7," so too did BAPCPA make chapter 13 harsher for consumer debtors (especially those above the state median income). This "race to the courthouse" idea for chapter 13 would help explain the substantial decline in the post-BAPCPA chapter 13 filing rate (down to half of prior levels), but does not explain why the pre-BAPCPA effective date rate did not correlatively increase, as was true in chapter 7. Rather, the total for the last five quarters in the chapter 13 rate is down about 25 percent from prior levels (from 110,937 per quarter to 82,809). Thus, chapter 13 filings the last five quarters are off by 28,128 per quarter.
Where did those chapter 13 filers go? To chapter 7, apparently—where for the last five quarters nonbusiness filings are up 23,589 per quarter. Overall, recall that average nonbusiness filings for the last five quarters (since BAPCPA was enacted) are down by only 4,581 per quarter, which is just 1.2 percent. However, there has been a shift in the composition of the filings as between chapters 7 and 13. Actually, there have been two distinct distributional shifts, in radically opposite directions. Before BAPCPA was enacted, the chapter 7/13 split was approximately 71/29 percent, as seen in Chart 5. Overall, in the five quarters since the enactment of BAPCPA, the split has moved to 78/22 percent, as seen in Chart 6. That is, since BAPCPA was enacted, total nonbusiness filings are almost exactly the same as before, but there has been some substitution effect of chapter 7 filings for chapter 13 filings. By contrast, Chart 7 shows that in the two complete quarters since the BAPCPA effective date (the first two quarters of 2006), nonbusiness chapter 7 filings totaled 154,924, while there were 108,484 chapter 13 nonbusiness filings, a chapter 7/13 split of just 59/41 percent. Thus, in this second time period, the percentage of chapter 7 filings has gone down substantially.
While Congress probably would be delighted if chapter 13 filings continued at over 40 percent of nonbusiness filings as reflected by Chart 7, one may wonder whether such will continue to be the case. Taken fairly, these statistics probably reflect little more than the far greater rate of filing acceleration from the post-BAPCPA to the pre-BAPCPA effective date in chapter 7 as compared to chapter 13 cases. In addition, it seems plausible that a small percentage of prospective chapter 13 filers chose instead to file chapter 7 prior to Oct. 17, 2005, while the prior more-generous chapter 7 option was available. Where the chapter 7/chapter 13 ratio will go in the future is difficult to predict. By the end of 2006, or perhaps more accurately by the end of the first quarter of 2007, we should have a better sense of that trend, since by then it is likely that virtually all of the "accelerated" pre-BAPCPA filers will have been accounted for.
Let us recap some findings from the data on bankruptcy filing statistics:
1. Bankruptcy filing rates have grown dramatically since the Bankruptcy Code went into effect, with total nonbusiness filings increasing six-fold from 1980 to 2006, and filings per 1,000 people increasing almost five-fold in that time;
2. Most of that increase occurred from 1985 to 1997, when filings quadrupled; since 1997, by comparison, filings are up only 15 percent total, and are up just over three percent when adjusted for population growth;
3. Overall nonbusiness bankruptcy filings went up dramatically in anticipation of BAPCPA's effective date, especially in chapter 7; and
4. Overall nonbusiness filings are down substantially since BAPCPA's effective date, but, taking these two points together, we see that:
5. The total filings since BAPCPA was enacted are virtually identical to prior filing rates, which were remarkably stable, which suggests that soon bankruptcy filings soon may revert to historic levels;
6. Chapter 7 nonbusiness filings had a higher "beta" than chapter 13 filings; that is, they went up more prior to BAPCPA's effective date and went down more afterwards than was the case for chapter 13 filings—indeed, chapter 13 filings did not change on the eve of BAPCPA; and
7. The ratio of chapter 7 to chapter 13 filings has shifted substantially in light of BAPCPA, with a pre-effective date increase in the chapter 7 ratio; a post-effective date decline in the chapter 7 percentage, and a slight increase in the chapter 7 percentage since the enactment of BAPCPA.
1 This paper would not have been possible but for the immense help and contributions of two people: Prof. Robert M. Lawless of the University of Illinois College of Law, and Rebecca M. Tabb, M.Sc. Economics candidate 2006, University College London, J.D. candidate 2009, Stanford Law School. The complete version of this article is included in the written materials for ABI's program "A Year after BAPCPA," held Oct. 16, 2006, in Washington, D.C.