Weekend Economists: Spock Lives! March 6-8, 2015

[Demeter]

56. Bankruptcy Filings Down Again 10.1% in February 2015 posted by Bob Lawless

DOWN, BUT NOT OUT...WE LOSE A COUPLE OF SMALL BUSINESSES EVERY MONTH IN THE ANN ARBOR AREA. AND THAT'S ONE SMALL CITY WITH SUPPOSEDLY HIGHER INCOMES.

http://www.creditslips.org/.a/6a00d8341cf9b753ef01bb07fdf325970d-400wi

Thanks to Epiq Systems, the latest monthly bankruptcy figures are out, and they show a 10.1% year-over-year decline. We now have had 52 straight months of year-over-year declines in the U.S. bankruptcy filing rate. The graph to the right shows the trend in year-over-year changes.

There was a daily average of 3,422 bankruptcy filings in February, compared to 3,804 from the previous year. Total February bankruptcy filings were just over 65,000. (Daily averages are computed based on business days.)

I forecast approximately 800,000 bankruptcy filings for the 2015 calendar year, and the first two months of the calendar year suggested we are spot on that forecast. The first few months of the calendar historically see the highest filing rates of the year. January and February usually account for about 15.5% of the annual total, and extrapolating that historical pattern to the 124,052 filings so far in 2015 puts us right at 800.000 for the calendar year.

http://www.creditslips.org/creditslips/bankruptcy_data/ LISTS 200 ARTICLES ON THIS TOPIC FROM THIS WEBSITE; A SAMPLE:

Rethinking “Small” Business Bankruptcies posted by Michelle Harner

It may surprise some, but approximately 90% of all chapter 11 debtors have less than $10 million in assets or liabilities, less than $10 million in annual revenues, and 50 or fewer employees. These companies are the heart of chapter 11. Nevertheless, most of the media and caselaw coverage discusses only the megacases—e.g., Caesars, American Airlines, Tribune Company, etc.—representing approximately 2-3% of chapter 11 debtors. It is time to change the focus of the conversation.

When a small business closes its doors, an entire community feels the impact. Consider the following description of the ripple effects of the closing of a small mine in Lincoln County, Montana:

In addition to the workers and families directly impacted by the loss of jobs, the ripple effects of the loss of that income will impact local businesses at every level. Restaurants, stores and other shops depend upon local consumers to keep themselves afloat, the dollars that are paid to those employees find their way into the hands of a number of additional places, keeping a small local economy alive.

Have Retail Reorgs Gone the Way of the Dodo? posted by Michelle Harner

In the past two months, four retailers have filed bankruptcy cases. RadioShack is rumored to be preparing a chapter 11 filing, and other retailers certainly appear to be struggling. But if you were counseling any of these retailers, would you recommend a chapter 11 filing? Okay, put aside the professional fees you might earn—would filing really be in the best interests of your retail client?

Consider this: from 2006-2013, the number of retailers liquidating in chapter 11 increased significantly. Although no data are perfect, the various data we have on chapter 11 filings are quite telling.

For example, according to the UCLA-LoPucki Bankruptcy Research database, during 2006-2013, 41.2% of large public retailers (excluding eating and drinking places) emerged from chapter 11 and 58.8% liquidated while, during 1980-2005, 60.5% of large public retailers emerged from chapter 11 and only 39.5% liquidated.

Likewise, a quick look at the New Generations Public and Major Private Companies database suggests a similar trend for 2006-2013: approximately 62% of retail cases in the database ended in a liquidation (36 of 58). A chapter 11 filing has, quite literally, become a “bet the company” decision for retailers...

One More Time, With Feeling posted by Bob Lawless

A Credit Slips reader pointed me to an article in the Atlanta Journal-Constitution pondering why the bankruptcy rate is falling. The piece is filled with quotes about the relevance of the economy and the cost of filing bankruptcy. Most of it is wrong. For example, it is right that the cost of filing has increased since the 2005 changes to the bankruptcy law, but there is no evidence the cost has risen in the last year. Thus, the rising cost of filing bankruptcy helps to explain why bankruptcy rates have declined relative to pre-2005 levels but not why they have declined since last year.

Regular readers will know a piece like this just pushes my buttons. Outstanding consumer credit has the strongest statistical link to the short-term ups and downs of the bankruptcy filing rate. The relationship is counter-intuitive and paradoxical. As consumer credit rises, banrkuptcy rates tend to fall in the short term. As people borrow to stave off the day of reckoning, they postpone bankruptcy. When consumer credit tightens, people are less able to borrow to satisify their current needs and, as they run out of options, are more likely to end up in a bankruptcy lawyer's office. When it comes to the economy, the bankruptcy filing rate tells us very little about the overall health of the economy. The strongest reason why bankruptcy filing rates have eased slightly is that consumer credit has become slightly more available, according to the Federal Reserve's latest release.

A previous blog post discussed at length the link between consumer credit and bankruptcy filing rates. That post featured a monthly trend line for the past few years. The relationship is long-standing, however. The graph to the right shows how bankruptcy rates tend to move with consumer credit since 1960. (Cllicking on the graph will open a larger image, and more detail about the calculations appear at the bottom of the post.) The consumer credit axis is inverted (such that negative numbers are at the top) to make the relationship easier to see. In addtion to the "ocular regression" of just eyeballing the charts in this post and the previous post, more rigorous stastical testing verifies the relationship. (Lawless, Robert M. (2007). "The Paradox of Consumer Credit," University of Illinois Law Review, 2007:347-74.) In making a forecast of this year's bankruptcy filing rate, I relied heavily on the trend in the available of consumer credit, and the forecast has been pretty close to spot on. And, in a self-congratulatory reference (humor me by pretending the rest of this paragraph is otherwise), it is not as if these points have not been made in the New York Times instead of just this small corner of the blogosphere.

This story on bankruptcy filing rates came out just as I was preparing for our Empirical Methods course. In the first week, my co-teacher, Jen Robbennolt, and I discuss how we all like to find patterns that don't really exist. Bankruptcy attorneys might see people come into their office who are unemployed and come to the conclusion that unemployment drives the bankruptcy rate. During economic downturns, the topic of bankruptcy becomes more salient, and we are more likely to remember stories about bankruptcy. Thus, we tend to associate higher bankruptcy rates with the economic downturn.

There is at least one way, however, that all of my data analysis is wrong. The data suggests there is a tendency for consumer credit to affect bankruptcy rates. Technically, all the data suggests is that there is a relationship--causality could be moving in the other direction although I think that is unlikely. The data describes the tendency--the average effect--and by so doing fails to capture any individual case, which is both the strength and weakness of the analysis. Also, the analysis does not explain all of the variation in bankruptcy filing rates. Unemployment, economiic downturns, and other factors such as foreclosures undoubtedly play a role, but it is just that their role pales in comparison to the role of the outstanding amount of consumer credit.


http://www.creditslips.org/.a/6a00d8341cf9b753ef014e8adc65ca970d-400wi
Notes on the graph: The graph shows the percentage change from year-to-year for total consumer credit outstanding and total bankruptcy filings. The right axis for consumer credit is inverted to allow a clearer understanding of the inverse relationship between the two data series. Total consumer credit, which includes both revolving and nonrevolving credit, is taken from the Federal Reserve Statistical Release G.19 on consumer credit. The bankruptcy filing data are from the Administrative Office for U.S. Courts. Because of limits on the availability of old bankruptcy filing data, all data are for the twelth months ending June 30 for the year shown or as of June 30 for the consumer credit changes.

http://www.creditslips.org/creditslips/2014/08/bankruptcy-filings-will-be-the-lowest-since-1995-here-is-a-reason-why.html

...Whenever I post these updates, someone will ask the reasons for the decline. Well, I have studied individuals who file bankruptcy, and I have arrived at the sort of conclusion that only can come from academic study -- people who file bankruptcy are heavily indebted.

Bankruptcy is all about the household balance sheet, specifically the right-hand side of the balance sheet. No debt, no bankruptcy. And, it has to be debt that a bankruptcy filing will help.

Overall debt levels are deceiving. Total consumer debt (not including mortgages) is about $3.1 trillion. which seems like an increase from 2006 when it was $2.4 trillion. Since 2006, however, the Fed has been separately reporting student loans, and that figure has been growing as a percentage of total consumer debt. Of course, a bankruptcy filing can do very little for student debt because of the strong presumptions against dischargeability.

The punch line is that if you subtract student loan debt and adjust for inflation and population growth, the consumer debt for which bankruptcy is most effective has fallen about 20% since 2006. "Bankruptcy" is not a synonym for "financially distressed." Rather, it is a legal act with legal consequences, and those consequences have become less beneficial for U.S. households. There is less debt that can be discharged in bankruptcy, lowering demand for bankruptcy filings.

Sometimes, I get push back about the relevance of unemployment rates. Sure, rising incomes and with full employment can dramatically lower the need for a household to file bankruptcy, but a crushing debt service -- perhaps from an medical crisis -- can overwhelm an income that was perhaps satisfactory for the debt that previously existed but not for the new obligations. Unemployment and income play a role, but the main factor driving the bankruptcy rate down is the lack of household debt, especially debt that can be discharged in bankruptcy.