Bankruptcies: A step down from the financial ledge
As more evidence of a recovering economy, and of improving household and business balance sheets, bankruptcy trends appear to have finally pivoted to safer territory.
Consumers and businesses in district states saw a fairly significant decline in the number of bankruptcy filings last year (see Chart 1). Every state saw a drop; bankruptcies in North Dakota dropped by 23 percent, and in Montana 17 percent, over the previous year.
Disaggregating bankruptcy totals by chapter—named after the laws that govern types of bankruptcy filings—shows some interesting differences. Bankruptcies are filed under chapters 7, 11, 12 and 13, each of which has different requirements regarding exempt and nonexempt debts and assets. The vast majority, however, are filed under chapters 7 and 13. (Last year, for example, there were a total of 217 and 62 bankruptcies in district states under chapters 11 and 12, respectively—a rounding error compared to chapters 7 and 13 filings.)
Chapter 7 bankruptcies are complete liquidations, after which debtors are unbound from debts and essentially allowed to start over. Roughly 95 percent of Chapter 7 filings are by individuals, according to the Administrative Office of the U.S. Courts. Chapter 7 bankruptcies exploded after the recession (see Chart 2), and their share of all bankruptcies in the district rose from 76 percent to 84 percent from 2006 to 2010. But last year the trend pivoted, with districtwide Chapter 7 filings dropping by 14 percent. Every district state saw a drop of at least 6 percent, and most had much larger drops (see Chart 3).
Chapter 13 bankruptcies are designed for debtors that have regular income streams and the potential to repay debt if it is restructured to more favorable terms. Virtually all Chapter 13 bankruptcies are also filed by individuals—of the more than 9,000 Chapter 13 filings last year, 98 percent were nonbusinesses. But unlike its cousin, Chapter 13 filings actually rose very slightly (0.3 percent) last year—based entirely on the fact that Wisconsin saw a small increase and Minnesota only a very small decrease, underperforming the national average by a considerable margin (see Chart 3). By comparison, the Dakotas and Montana saw Chapter 13 filings that roughly equaled or beat the national average.
For historical context, district states have seen both better and worse bankruptcy levels in just the past decade. Bankruptcies trended higher during the 2001 recession, and in 2003 they reached levels similar to today. But bankruptcies rose even more strongly in 2004 and 2005 because of a change in bankruptcy laws that essentially pulled forward a huge number of filings. In 2005, districtwide filings approached 75,000 (compared with a recent peak of about 60,000 in 2010), but then fell to about 25,000 in 2006.
For more historical data and discussion of bankruptcy trends in the Ninth District, see the July 2009 fedgazette.