WHY ARE BANKRUPTCY FILINGS ARE AT A TWENTY-YEAR LOW?
In 2021, the most recent year in which such information is available, the annual number of bankruptcy filings nationally, totaled 413,616. The 2021 figures are indicative of a downward trend in bankruptcy filings, beginning in 2010, with 1,536,799 filings. The highest number of filings since the year 2000, was 2005 with 2,039,214 filings, and the lowest filing year was 2021.
Are the number of bankruptcy filings an indication of the strength or weakness of the national economy? Such assessment is generally assumed by examining what is referred to as economic indicators.
One indicator is employment or unemployment rates. Between the years 2000 to 2020, the average unemployment rate was 6.21%. During this term, the lowest rate of national unemployment was 3.6% in the year 2019, and the highest was in 2009 with 9.9%.
In the year 2004, in which the annual unemployment rate was 5.4% with 7.9 million persons unemployed and 3.2 million unemployment insurance claims, the number of Bankruptcy filings was 1,563,145. In the year 2005, the national unemployment rate was 4.9% with 7.3 million persons unemployed and 3.3 million unemployment claims filed, with 2,039,214 Bankruptcy filings. These two years are below the average in the last twenty years for not only the unemployment rate but also the number of unemployed and unemployment claims. However, 2004 and 2005 were particularly robust years in Bankruptcy filings, with 2005 containing the largest number of Bankruptcy filings during the period between the years 2000 to 2020.
Further examination shows that the years 2000 to 2005 held a larger than an average number of Bankruptcy filings, despite unemployment rates, a number of unemployed, and insurance claims that were below the average for the same twenty-year period. In the year 2000, the national unemployment rate was 3.9%, with 5.6 million persons unemployed, and 3.1 million unemployment insurance claims filed. In the same year, there were 1,217,972 Bankruptcy filings.
The most comparable year in unemployment number to the year 2000 for the same twenty-year period would be either the year 2018, in which the unemployment rate was 3.9%, with 6.4 million unemployed and 2.1 million unemployment claims or 2019 with 3.6% unemployment, 5.9 million unemployed and 2.1 million unemployment claims. In the year 2018, there were 751,186 Bankruptcy filings and in 2019 there were 752,160 filings.
Despite somewhat comparable years in unemployment rates, unemployed persons, and claims, the number of bankruptcy filings in the year 2000 greatly exceeded the number of filings in the years 2018 and 2019. Although unemployment statistics are an imperfect measure of economic vitality, because, for example, such statistics do not account for persons who have dropped out of participation among laborers, such divergent in bankruptcy filings in comparable periods of unemployment, and its attendant markers, may lead one to surmise that there is no direct correlation between unemployment and bankruptcy filings.
Another economic indicator is Gross Domestic Product. During the same 2000 to 2020 period, the Gross Domestic Product, expressed in billions of dollars, has more than doubled, from $10,251 in the year 2000 to $20,893 in the year 2020. Again, there are certain problems with equating Gross Domestic Product with national economic health. Among other concerns, Gross Domestic Product incorporates inflation in its calculation, along with government spending, which may bring spurious benefits to the individuals who participate in the national economy, some of whom elect to file Bankruptcy.
Although bankruptcy filings are often used as an economic indicator by analysts, the factors driving the number of bankruptcy filings may have a scant correlation to the state of the economy, in terms of how such economy is traditionally measured. Other factors may be more determinative in the number of persons seeking the protection or benefits of bankruptcy.
The writer is a Bankruptcy Attorney in the State of Florida, who has since 1993, represented exclusively debtors in bankruptcy proceedings, having filed many thousands of bankruptcies on behalf of such debtors, with direct contact and counsel with those same persons or individuals. Although the writer has not kept strict records of client motivations for filing bankruptcy, there appears to be some commonality in the reasons expressed by the individuals who elect or seek to file bankruptcy.
It is the writer’s impression that the aggressiveness of creditor action is a primary impetus in debtors who file bankruptcy. Most individuals who seek bankruptcy protection report some form of creditor action or collection efforts. Such collection efforts may arrive in the form of phone calls, letters, and other non-judicial collection behavior. The aggressiveness of the creditor action seems to relate to the likelihood that the debtor will seek measures, including Bankruptcy, to address such action. The more aggressive the actions of the creditor or creditors, the more likely the debtor will seek Bankruptcy as a response to such actions.
Judicial enforcement of creditor claims certainly has a strong effect on debtors who seek to file Bankruptcy. Such measures include foreclosures, lawsuits, wage garnishments, and the threat of repossession of one’s automobile, or other collateral. The large majority of persons who elect to file bankruptcy will cite such creditor actions. The number of persons constituting a clear minority who file bankruptcy report that they are not subject to any form of collection effort. Such persons typically seek the filing of bankruptcy as a measure to eliminate the debt that is impeding their ability to develop beneficial credit. Such debtors may wish to purchase a home, pursuant to a mortgage, and the debt to which they are subject operates as an impediment to such desire. Bankruptcy can operate as a device to not only eliminate such impediments, but also for many debtors to improve the necessary credit and credit scores required to acquire a home loan, and other benefits for which credit is a necessary component.
Another factor could be the influence of the media in its reporting on the subject of bankruptcy. During the two decades spanning the years 2000 to 2020, the largest filing year was 2005, with over two million bankruptcy filings. In April of 2005, Congress enacted The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA). The media reporting on the substance of the Act and its ramifications largely contained the narrative that such an Act would be heavily punitive against debtors filing bankruptcy and would severely restrict bankruptcy as an available avenue for relief. Many of the persons who attended the offices of the writer were under the impression that bankruptcy would no longer be an available remedy after the passage of the Act and was scrambling to file bankruptcy before such passage.
Such concerns were not warranted. Although the BAPCPA contained some elements detrimental to the rights and positions of debtors, substantively the landscape of bankruptcy law remained the same. In the Middle District of Florida, in which the writer practices, the Bankruptcy Court before the passage of the BAPCPA required debtors to pay a minimum of 20% to the general unsecured creditors in a Chapter 13 bankruptcy. Because the BAPCPA permitted the debtors to pay as low as 0% to the same unsecured creditors, the writer elected to delay the filing of many of his clients’ bankruptcies until after the passage of the BAPCPA.
The warnings in the media regarding the ramifications of the passing of the BAPCPA were misleading, if not untruthful. However, the fear among the population of persons contemplating the filing of bankruptcy was very real. Many clients expressed a belief that bankruptcy would altogether be eliminated as an option to address debt and creditor actions. Such belief is certainly supported by the statistics regarding bankruptcy filings. In 2005, the number of bankruptcy filings exceeded two million, and in 2006, such filings met a sharp decline to 597,965.
One effect, however, of the enactment of the BAPCPA was to make the practice of bankruptcy law progressively more complex and burdensome. For most debtors, the filing of bankruptcy without adequate legal representation could prove disastrous. The paralegal firms and the attorneys who filed occasional bankruptcies are mostly now non-existent. The practice of bankruptcy law has become exceedingly more specialized, and there are fewer practitioners willing to undertake the demands of such practice.
In 1993, the filing fee for a Chapter 7 bankruptcy was $160.00 and has incrementally increased to $338.00 in 2022. The Chapter 13 Trustee fee in 1993 in the Middle District of Florida was 5% of monies distributed and is now, in 2022, 10%. The combination of these factors has made the availability of securing competent representation and the filing of bankruptcy less likely for some debtors already under certain financial restraints.
It is a well-known adage among bankruptcy attorneys that bankruptcy filings tend to increase around the period in which debtors receive their income tax refunds. Available disposable income logically means such recipients, who need bankruptcy relief, are more likely to have funds to retain a bankruptcy practitioner and file bankruptcy.
Perhaps the sharp decline in the number of bankruptcy filings, among the many other economic indicators, is the best measure of the true state of the economy. If such a proposition is correct, the economy has been in a steady decline from 2010 when the number of bankruptcy filings was 1,536,799 to 2020, with 522,808 filings. In 2021, the number of bankruptcy filings was 413,616. In the year 2022, bankruptcy filings have increased but tracking well short of the number of filings from the halcyon period of 2000 to 2010.
The anticipated increase in the number of bankruptcy filings for 2022 over the year 2021 could be related to the end of various government-imposed moratoriums on foreclosures, evictions, student loans, and other collection efforts. However, the general trend in bankruptcy filings from the year 2010 to current is mostly downward.
So, again the proposition that a decline in bankruptcy filings is an indicator of a declining economic environment. One other motivation for those filing bankruptcy is to obtain what is referred to as a “fresh start”. It may appear counterintuitive, but many seek bankruptcy because they have hope for the future. Subsequent to the absolving of one’s debts, one may reestablish one’s financial foundation, improve one’s credit, buy a house, possibly support a family, and perhaps after a lifetime of labor, obtain a dignified retirement. When an analysis is conducted as to the economic health of a nation, in place of the traditional economic indicators used by analysts, perhaps the likelihood or unlikelihood of such aspirations are the better indicators to employ.
In this period of declining bankruptcy filings, if one was to ask a random sampling of persons whether such aspirations were more likely in 2015 or 2022, what does one think would be the answer?
About Author.
- Matthew Weller is a bankruptcy attorney and President of Weller Legal Group, PA. Since 1993, Mr. Weller’s legal practice has been dedicated exclusively to the representation of debtors in bankruptcy proceedings.
Reference:
Unemployment Statistics; Bureau of Labor Statistics
https://www.bls.gov/charts/employment-situation/civilian-unemployment-rate.htm
Bankruptcy Filing Statistics; United States Courts
https://www.uscourts.gov/news/2022/02/04/bankruptcy-filings-drop-24-percent#:~:text=Annual%20bankruptcy%20filings%20in%20calendar,31%2C%202021.
Gross National Product; Bureau of Economic Analysis
https://www.bea.gov/data/gdp/gross-domestic-productce:
