Latest personal bankruptcy data confirm rising trend

(1.26.24) The latest bankruptcy data just dropped and - it's official - personal bankruptcy filings are on the rise.? Today, US Courts published fourth quarter 2023 data, which confirm a clear tick up in filings after bottoming out in 2022.

Total filings for full year were 434,064 in 2023 - up 16% compared to 2022. Chapter 7 and 13 filings were 251,048 and 182,630 for the full year in 2023, up by 15% and 17% from 2022, respectively.

Read on for charts further context, charts and analysis, including:

• Why credit watchers should?take note;
• The shifting proportion of Chapter 7 and 13 filings; and
• An unusual demographic trend.

Personal bankruptcies should be back on credit watchers' radar screens

Personal bankruptcies directly contribute to both defaults and losses, but have largely been off the radar for most credit watchers for many years.? That's because filings have been relatively low and falling while the U.S. economy enjoyed its longest expansionary cycle ever (Figure 1).? Even during the brief pandemic-led recession, personal bankruptcy filings stepped down further as debt relief and fiscal stimulus helped borrowers avoid the worst.

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Figure 1

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The proportion of Ch. 13 filings in 2022 and 2023 are at a record high

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The relative proportion of Chapter 7 and Chapter 13 filings [1] shifted in during the teeth of the pandemic, signaling a change in some important underlying credit fundamentals. More specifically, the proportion of Chapter 7 filings shot up in 2020 and 2021, while Chapter 13 filings fell (Figure 2). In the years leading up to the start of the pandemic, the proportion of Chapter 7 to Chapter 13 filings was about 62%/48%. Those proportions swung to 70%/30% during the first two year of the crisis.? In 2022 and 2023, however, the proportion of Chapter 13 filings shot back up to 42%, a record high going back to the global financial crisis.

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Figure 2

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A US Courts report explains the drop in 2020 Chapter 13 filings is due to "…the decline in mortgage foreclosure filings," citing also the drop in consumer debt levels due to COVID relief and protection measures, such as the CARES Act [2]. The basis of that conclusion, i.e. the steep drop in foreclosures, is illustrated by Figure 3.? Though still below the pre-COVID run rate, foreclosures have picked up a bit in recent quarters. Consequently, the proportion of Chapter 13 filings has also increased.

Figure 3

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Filings by older Americans remains high

A notable demographic shift in personal bankruptcy filings is evident from time-series filings broken down by the age of the filers.?Filings remain exceptionally low across all age cohorts in absolute terms (Figure 4), but the oldest two cohorts (Ages 60-69 and 70+ a.k.a. "Baby Boomers" and the "Silent Generation") have more than doubled their relative share of filings since 2000, from 9% in 4Q20 to 23% in 4Q24 [3].

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Figure 4

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To a large degree, this increase mirrors the aging and relative size of the Baby Boomer and the Silent Generation. Boomers are expected to remain the largest cohort until 2028, when Gen X will join Millennials in overtaking them (Figure 5) [4] . Until then, this "bulge bracket" of older Americans, most of whom are on fixed incomes, will continue to grow in proportion over the coming years.? Something to keep an eye on from a credit perspective.

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Figure 5

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Footnotes:

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[1] For the most part, consumers avail themselves to one of two legal routes for relief (called Chapters) under the Bankruptcy Code - Chapter 7 or Chapter 13.? Chapter 13 provides debtor relief by reorganizing and reducing the amounts owed.? Chapter 7 goes a step further and allows for a complete discharge of debt.? In both cases, certain debts (e.g. most student loans) may be exempted from such relief.

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[2]? "Just the Facts: Consumer Bankruptcy Trends, 2005-2021," accessed April 12, 2023. Retrieved from link.

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[3] In 2005, Congress passed the Bankruptcy Abuse Prevention and Consumer Protection Act, which precipitated a "pull-forward" spike in activity.

[4] Fry, R., (2020, April). Millennials overtake Baby Boomers as America's largest generation. Retrieved from link.

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