Bankruptcy filings have been down in the last year. In theory that’s a good thing but that is not necessarily all good news. And it certainly isn’t good news for those of us in the business of filing bankruptcies!
If you ask 10 bankruptcy lawyers what filing volume will look in the future, you’ll get 11 opinions and 2 fights. So take what I have to say with a hearty grain of salt.
My theory about bankruptcy filings is essentially this: People and businesses need to be taking risk for our economy to grow — and also for bankruptcies to increase. It’s a simple idea which we bankruptcy professionals hope doesn’t catch on for long — If you don’t accumulate debt, you probably won’t go bankrupt someday. Shocking, I know.
Don’t get me wrong. There will always be a “background hum” of bankruptcy filings, even if almost no one borrowed money ever again. You can end up owing money to someone through unpaid bills (like medical care or rent), or through your negligence (like a car accident), or breaches of other business contracts.
But the variation in the overall case volume — the spike or the crater in the annual chart — depends on consumers incurring debt and, ultimately, not being able to pay it back.
Right now the overall economy is coming back and consumers are spending again. That’s good news for the economy and for bankruptcy professionals. But it isn’t coming back fast. Retails sales were reportedly lackluster during this holiday season. Banks have cut back on their credit card offerings to consumers. And most critically we are not yet seeing an expansion of consumer borrowing — except in the student loan area — yet.
In other words, people are getting more comfortable spending money but they are not yet confident enough to borrow it.
That’s not a bad thing — but it isn’t all good either. The American economy (like most Western markets) thrives on borrowed money. So long as consumers are borrowing for hard assets — buying stuff and not simply consumption — then their households can typically keep going for the long-haul and businesses will thrive too. And the reality is we have over 100 million households, so there will easily be 1-2% of those households “failing” to balance their books perfectly just as the natural result of unexpected financial turbulence of life.
I suspect there is also some decrease due to changes in laws and regulations. Specifically changes to how credit card debt is accumulated and collected. For example, the end of “universal default” clauses prevents a family from facing 30%+ interest rates on cards they were current on simply because they defaulted on another card. That makes it easier to focus on the single problem and not face a snowball of higher payments across all your debt. Less profitable for banks (in theory) but (in practice) it really means fewer defaults, fewer collection calls, fewer lawsuits, fewer bankruptcies.
Or, to put it another way, the government is forcing the banks to adopt a more sustainable lending model which squeezes — but doesn’t break — the customer. Good for their business, bad for mine.
There is a rampant theory among professionals that next year will see a surge in filings because it is 8 years from the 2005 surge. 2005 was the year bankruptcy amendments took effect and huge numbers of folks filed to beat the changes. 8 years is the current time limit between Chapter 7 filings so, the theory goes, those folks will be back because they know bankruptcy “works” and probably need help again.
I don’t buy it. For several reasons. Mostly, 2 million households experienced bankruptcy in 2005. More than average but still under 2% of the total households in the nation. If those folks are in trouble, they can get relief now — in Chapter 13, for example. And there are some who have done so. In other words, this “pent-up” volume would only be for folks who may need to file but can soldier on somehow until next year. The rest in more urgent need of help have likely already called their lawyers.
The simple truth is that bankruptcy volume tends to accompany consumer credit expansion. So until people start borrowing more on their cards, Christmas will have to wait a little longer for bankruptcy lawyers.
Photo credit: Flickr/TreyDanger