Bankruptcies Falling Again

Here's something I didn't expect to see when I moseyed by the bankruptcy statistics at Credit Slips:


Bob Lawless, who made the graph, expects them to decline further in 2011, to about 1.45 million.  Not what I would have expected with the financial crisis a few years behind us--I would have expected to see filings still rising, as families ran to the end of their resources.  1.45 million is fewer bankruptcies than the US saw in 2004 with a booming housing market and an economy and a job market growing at a pretty decent clip.

This may be evidence on a question that has puzzled bankruptcy experts--was the precipitous decline in bankruptcies after the 2005 bankruptcy reform act real, or was it simply a lull before the storm?  Everyone agrees that the initial drop was a result of a lot of bankruptcies being moved forward before the law took effect--everyone who thought they might need to declare bankruptcy did.  But there has been a lot of analytical effort put into trying to figure out what was going to happen later:  would they stay low, or would they inexorably go back to their old level?  Obviously what you think depends on what you think the causes of bankruptcy are:  if you blame low saving and irresponsible consumers, you're apt to think that bankruptcy will fall when it becomes harder to get a discharge.  If you think bankruptcy is mostly the result of cruel economic forces--medical bills, predatory lenders, or what have you--then you'll expect them to go back up.

There's been some evidence for Ronald Mann's "Sweat Box" model of consumer debt.  The idea is that the law wouldn't actually end up reducing the number of filings; it would just slow down the filings, so that consumers spent longer struggling, and paying high fees and interest charges to the lenders.

But that looked more convincing when they were rising towards their old rates.  Now that they're filing again, it may be time to revisit.  of course, it's not a big fall--but as I say, the economy is considerably worse now.  If it falls further, I think we'll eventually have to say that the bankruptcy reform did produce a measurable, if not enormous, reduction in bankruptcies.

(Still don't think it was a good idea . . . but that's a different argument for a different day.)