Consumer Bankruptcies Soar

According to the American Bankruptcy Institute, or ABI consumer bankruptcies soared to their highest level since the bankruptcy laws were changed back in September of 2005. That change made bankruptcy much more painful for the individual debtor, and was responsible for the huge spike in filings shown on the graph below (from http://www.calculatedriskblog.com/).

Note that the third quarter number shown in the graph is estimated at 3x the July filing rate of 126,434. This is probably a conservative estimate. The July rate was 8.7% higher than June, and up 34.3% from a year ago.

Since the start of the year, 802,000 individuals have filed for bankruptcy. The July rate would equate to 885,000 people going bankrupt, so clearly we are still in an uptrend, and historically the number of bankruptcies peaks well after a recession is over.

The report did not specify the causes of the bankruptcies, but clearly the rapidly rising unemployment rate and uninsured medical expenses are likely to be significant factors. The ABI is predicting there will be 1.4 million filings this year.  I suspect it will be higher than that.

One of the major problems in the economy is that the consumer has too much debt. If there is not enough income to service and repay the debt, then debt will come down through bankruptcy. Rising levels of delinquencies on all forms of consumer credit, such as mortgages and credit cards indicate that there will be more filings in the future.  This is not good news for the credit card heavy banks like Capital One (COF: 32.41 +0.96 +3.05%) and American Express (AXP: 31.80 +1.44 +4.74%).