ANALYSIS: Consumer Bankruptcy Filings Are Low. Too Low.
As the pandemic closed down, I was convinced that bankruptcy rates would skyrocket by the time we hit the third quarter of 2020. Yet as we wait to see any sign of a spike that Would take us back to 2010 deposit levels, I’m starting to feel like the boy who cried wolf.
As Chapter 11 business bankruptcies have intensified, bankruptcy filings as a whole are on the decline. With widespread unemployment, rising corporate bankruptcy filings, continued closings and stalled reopens, consumer bankruptcy filings are so low they defy logic. If you read my plays, you know I like numbers. The more historical the numbers, the better. So, I dug into the numbers to get a feel for what’s going on here.
Where have all the bankruptcies gone?
Consumer bankruptcy filings are low. Too low. The bulk of bankruptcy filings are consumer bankruptcies. In any given year, consumer bankruptcies constitute at least 95% of bankruptcy cases. For this reason, I took a closer look at the purest form of consumer bankruptcy, Chapter 13. Since the pandemic, consumers’ monthly Chapter 13 filings have fallen by more than 50%.
Chapter 13 is sometimes referred to as “salaried bankruptcy” and is often used by debtors with regular income and modest assets, usually a home. While I couldn’t find reliable numbers for the percentage of Chapter 13 filed to prevent foreclosure, many practitioners would agree that one of the main reasons consumers choose Chapter 13 over Chapter 7 is to save their house. With over 4 million homeowners enjoying mortgage forbearanceWith states instituting moratoriums on foreclosures and, until recently, improved unemployment benefits, consumers have little incentive to go to bankruptcy court just yet.
A look behind the foreclosure numbers
In 2009 and 2010, bankruptcy filings and foreclosures were at their highest. These years averaged over 2.8 million foreclosures, while bankruptcies topped 1.4 million in 2009 and peaked at over 1.5 million in 2010. As illustrated in the charts below, before the pandemic, foreclosures started and default rates fluctuated and circulated almost at the same time. Since then has gone wrong.
While monthly mortgage default rates more than doubled in 2020, from 3.2% in January to 7.6% in June, monthly home foreclosure starts have been reduced to nearly 20%. % of their pre-pandemic figures, from over 42,000 in January to 5,900 in June. Since the pandemic, monthly foreclosure starts have remained at least 20,000 to 30,000 lower than they were in 2019 and the first quarter of 2020. But seriously delinquent mortgage foreclosures will need to be filed at at some point.
There is a deficit of seizures, and there will eventually be a correction. Even after the country’s exit from the pandemic, however, the number of Chapter 13 bankruptcy filings could remain low. The rosier way forward involves Americans getting back to work. We are a country of optimists, and I am no different. I hope that the economy and the labor market will improve and that many of the current unemployed will return to work, find new jobs or create their own opportunities. Many mortgage lenders also work with forbearers to transfer missed payments at the end of loans, thus avoiding exorbitant lump sum payments. Moreover, while it seems less likely from day to day, Congress and the White House could extend the stimulus measures.
A less rosy path to fewer bankruptcies could materialize if we continue on a path of patchwork closures, resulting in further layoffs and layoffs. One of the requirements for filing Chapter 13 is that the debtor must have a regular income. With weekly initial unemployment claims hovering nearly a million, more Americans are becoming ineligible to file Chapter 13.
Also, it is often said that “it costs money to go bankrupt”. This is especially true when “going bankrupt” involves the filing of a bankruptcy case and the associated filing and attorney fees. As the pandemic continues, families are running out of supplies and could end up with too little to even make it to the courthouse steps.
Today more than ever, it is impossible to make predictions. This pandemic has shown us that variables can change dramatically overnight. I can’t resist the urge to try though. I will continue to monitor bankruptcy rates, unemployment, default and foreclosure rates, and any other numbers I can get my hands on to try and get a feel for the direction of bankruptcies.
If you are reading this on the Bloomberg terminal, please run BLAW OUT