There were over 158,000 bankruptcy petitions filed in the US in March 2010, according to a recent report from Aacer, a bankruptcy data collection company, which was 35% more than the previous month. This was also a 19% increase over filings in October 2009, the previous high since personal bankruptcy law was tightened in October 2005.
Taking it to a more local level, the Bankruptcy Court of the Eastern District of Oklahoma highlights the same trend as the rest of the US, showing an increase in of 8% for the first quarter of 2010, compared to the same period in 2009 and 31% higher than 2008.
Outlook for Bankruptcies in 2010 and 2011
Rather than make bold and unreliable predictions, we can look back at data coming out of previous recessions. It gives us a solid reference point for a range of possibilities this time around.
Unfortunately, if history repeats itself, the outlook isn’t great. If we look at data from the American Bankruptcy Institute, we can see that bankruptcy filings have continued to worsen for up to 5 years coming out of previous recessions. Rolling that historical data forward, we could see bankruptcy filings continue to increase through 2011 and possibly as far as 2014. It’s impossible to know how much worse it will get and when the high point for bankruptcy filings will be, but it is reasonable to envisage that 2010 will be worse than 2009 and there’s a good chance that 2011 could be worse still.
The positive economic data we are getting about the state and national economy seems to conflict with this outlook, but it makes sense if you consider that bankruptcy petitioners can often struggle through a couple of years before they finally file for bankruptcy.
It also seems strange to think that further increases in bankruptcy filings would be “normal” for a recovery, but if history repeats itself, that is exactly what we should expect to see.
High Debt Levels
And finally, for a couple of contributing factors to a further increase in bankruptcies:
On a business level, US companies had more leverage (debt) leading up to this recession than at any time in the past, according to the Federal Reserve.
On a personal level, there is more leverage on the average US individual than at any time in history. Personal borrowing in the US is now ten times higher than in 1960 (adjusted for inflation).