



First, let us look at the stats of bankruptcies for the last two years:



Bankruptcy is normally the rock bottom financial point for companies but also individuals and in 2008 we saw a steady rise in people filing. For many bankruptcy is a fresh start even though the connotation of filing may make many people weary about going down the path. In recent years, filing bankruptcy has become harder in part because of tougher legislation but there is only so much you can do when someone is unable to meet their financial obligations. This week we saw that General Motors and Chrysler were given a timeline by the government before they would enter into a pre-packaged or structured bankruptcy.First, let us look at the stats of bankruptcies for the last two years:

In September of 2008 we broke the 1,000,000 mark for bankruptcy filings over a 12-month period. This number has been steadily increasing and we can expect to see more filings in 2009. Even though many will look at unemployment as a lagging indicator regarding the health of the economy, a family that is teetering on the financial edge will not have much room to breath and a job loss is normally the tipping point. With over 5 million jobs lost since the start of the recession, many of the job losses are occurring only in the last four months, we can expect that bankruptcies will begin skyrocketing in the summer and fall of this year.



Another major trend we are seeing is many are opting to go with Chapter 7 bankruptcies, which are liquidations. Take a look at the recent rise:







Now why would this be such a big deal? Well first, Chapter 13 is normally regarded as a “wage earners” bankruptcy where a plan is restructured and debts are modified to help make the payments more manageable. Yet how are all those people that are now unemployed going to make a mortgage payment? In other markets, the lag time in finding another job was relatively short if the economy was robust. Now, you have 4 people competing for every 1 job position that opens up. The rise in Chapter 7 in relation to Chapter 13 tells us many people are simply unable to make their payments even if a plan is restructured.



Now this makes complete sense on a micro level. If a person over extended their financial commitments when credit was easily accessible and now has lost their job, they may no longer be able to meet their financial obligations. For example, say a person purchased a home at the peak with an adjustable rate mortgage with very little down, this person may have had problems even if they still had their job. Add unemployment into the mix and it is a recipe for financial disaster. This would even be the case with a traditional mortgage and we are now seeing this with the rise of defaults in prime mortgages.



You may be wondering why in 2004 and 2005 filings spiked up. During this time legislation was being pushed to make it harder on people to file for bankruptcy. One of the provisions looked at median income of the state in relation to the debt. That is, if you were working you had to rework some sort of payment plan. That is why you still see that Chapter 13 although not as high as Chapter 7, is now reaching levels that are close to 2004 and 2005.



Now looking at bankruptcy filings may be a good indicator of the overall health of the economy. Some are looking at the stock market but employment and bankruptcies provide a better sense of how the average family is feeling this recession. We should keep our eye on this quarterly filing since it will be a good place to see when things will be bottoming out for the average consumer.