August 19, 2006

Weekend Question 2: Is The “Bankruptcy Boom” Back?

ANSWER: Probably not, despite some attempts in the media to pretend otherwise.

I think Liz Pulliam Weston knows better than to claim (HT Free Market News Network) that “the bankruptcy boom is back.” She’s been a financial writer for too long not to know that the following is disingenuous, given the history of bankruptcies during the past quarter-century:

Consumer bankruptcy filings continue to increase, with Chapter 7 liquidation filings rising 54% in the second quarter compared to the previous three months.

Consumer bankruptcies had plunged following the passage of a tough new bankruptcy law last year.

By the second quarter, however, the pace of filings had picked up to 2,200 to 2,300 new filings per business day, more than four times the level in November 2005 after the bankruptcy law went into effect, according to Chris Lundquist, founder of Lundquist Consulting, which tracks bankruptcy trends.

Individuals filed 85,449 Chapter 7 cases in the three months ended June 30 and 142,815 bankruptcy cases overall, a 39% increase from the previous quarter. (Most consumer bankruptcies are either Chapter 7s, which allow people to erase most of their unsecured debts, or Chapter 13s, which require that at least some of the debt be repaid over time.)

Gimme a break, Liz:

  • Total bankruptcies were roughly 1.5 million a year in 2002, 2003, and 2004.
  • 2005 bankruptcies spiked in the fall of 2005 as the October 16 effective date of bankruptcy “reform” approached. There were 619,000 filings in the first half of October alone.
  • So what does Liz do? She starts with November 2005, the month after the new law took effect, in an attempt to create the impression that there is a new wave of bankruptcies coming that may be as bad as the old wave (otherwise, why would she say it’s “back”?). Anybody with an ounce of sense would have to know that there would be a huge post-”reform” drop in the wake of the pre-”reform” rush. So OF COURSE it was going to take at least six months before anyone could get a reading on what the ongoing post-”reform” level of bankruptcies might be.
  • It takes three paragraphs, a limited chart only dealing with 2006 filings, and about 10 more paragraphs before we start to learn that current bankruptcy filings are wayyyyyy below those that were occurring before the new law kicked in.
  • If the second quarter figure she uses is correct (the courts haven’t released their second-quarter data as of Thursday morning, when this post was done) and that rate continues, the post-”reform” annual rate will be less than 600,000, or over 60% lower than the last three full pre-”reform” years. Some “boom.”

My take:

  • The post-reform rate will probably be more on the order of 700,000 – 800,000 per year, hitting its peak in the first quarter of next year and pretty much staying there from that point forward.
  • Whether this “permanent” reduction in annual filings of roughly 700,000 per year is a good thing totally depends on whether there is a rise in home foreclosures that offsets the reduced number of bankruptcy filings.
  • Some initial indications in the mortgage market aren’t good (link requires free registration, plus a “grain of salt” warning, based on the organization that is predicting trouble ahead; it just so happens to be associated with vote fraud in Ohio), but it’s way too early to tell. If there is a rise in foreclosures, it may be more than partially driven by the kind of fraud described in this Boston Globe article (HT Wizbang) that targeted less-than-sophisticated Hispanic homebuyers, who as I noted last year (first item at link), are unfortunately and all too often perfect targets for unscrupulous lenders.
  • On the other hand, the recent increase in refi-driven mortgage applications (link requires free registration) despite slightly higher rates may be a sign that those who need to refinance to avoid big increases in adustable-rate and interest-only deals they are currently in can do so.

If an increase in the rate at which families lose their homes offsets what would appear to be a permanent decrease in bankruptcy filings, I don’t see how anyone but the most hard-hearted could consider that an improvement. But, Liz, the jury’s still out.

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