Bankruptcies Closing in on New Record

As of the end of the 47th week of 2001 (through Thanksgiving week), 1,321,023 personal bankruptcies had been filed in the U.S. this year. With 5 weeks to go, the cumulative total for the year is only 57,000 cases short of the record-high 1,378,000 cases filed in 1998. Filings this year are 19.6 percent higher than for the first 47 weeks of 2000, according to Visa's Bankruptcy Notification Service. In the holiday-shortened Thanksgiving week (all courts were closed on Thursday, November 22) there were 23,342 petitions filed. Interestingly, the chart below shows that filings continue to exhibit the seasonal patterns that have characterized bankruptcies over the past 3 years. In particular, there is still no clear sign of fall-out stemming from the terrorist attacks in September. In fact, the most remarkable feature of this year's filing profile is the sharp increase in petitions last March, coincident with the rapid passage of bankruptcy reform legislation in both the U.S. House of Representatives and the Senate. It seems increasingly clear that debtors during that period were being advised to file quickly so that their petitions would be considered under the old rules.

We continue to believe that another, recession-induced surge in bankruptcies is coming. Lenders may have tightened up standards, especially for subprime borrowers, but the surge in unemployment witnessed this fall will likely continue through the first quarter of 2002. Consequently, the financial squeeze on newly unemployed borrowers that already have loans and credit cards will continue to drive up chargeoffs and bankruptcies well into next year. Forecasts of single-digit increases in bankruptcy filing volume during 2002 seem overly optimistic.

As for bankruptcy reform, in late November there were some signs of movement in the House-Senate conference committee that is working out a compromise version of the House and Senate legislation. House conferees sent their Senate counterparts a list of provisions on which they were willing to compromise. However, they indicated no willingness to concede their position on the two primary areas of disagreement, (1) limits on the homestead exemption (through which borrowers can shelter the full value of their primary residence), and (2) prohibiting borrowers convicted of violent crimes (such as abortion clinic attacks) from filing for bankruptcy to avoid paying court-ordered fines. With the clock ticking down toward the end-of-year recess, many observers believe that passage in 2001 is unlikely.

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