Bankruptcy filings are soaring in the United States. In the last data point, we had 134,282 bankruptcy filings for the month of March 2009. Bankruptcy data usually lags 3 or 4 months but the trend is ominous. For the last 12 months some 1.2 million bankruptcy filings have occurred. Much of this is linked to the 26,000,000 unemployed or underemployed Americans being unable to pay their bills or even service their debt. What is more telling is the amount of Chapter 7 bankruptcies occurring since these are straight liquidations and not like a Chapter 13 restructuring.

Let us examine the most recent data for bankruptcies that highlight this troubling trend:

What you’ll notice is a significant spike in the March data point. This monthly jump was enormous. This was the largest number of quarterly bankruptcy filings since December of 2005 when many were rushing to beat the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005. Yet even with the law making it harder for people to file bankruptcy, most are being forced into austerity and it is hard to squeeze anything further out of a turnip. What this tells us is that for average Americans there is still a significantly large amount of pain in the real economy. The unemployment rate is understated by the 9.5 percent headline number.

Below is data showing quarterly bankruptcy filings:

It is interesting to note, that even during the supposedly boom times of this decade, there were more people filing bankruptcy than during the bust since the recession started in December of 2007. The new bankruptcy legislation is designed to make it much harder for borrowers to file but ironically, during this same time banks have been having nearly unlimited borrowing power from the U.S. Treasury and Federal Reserve. As I discussed in a previous article the Federal Reserve will protect banks before it seeks to protect consumers.

The major sticking points of the 2005 legislation requires means tests, higher filing fees, mandatory credit counseling, and other obstacles preventing people from filing bankruptcy. If you put enough hurdles, you will see a decline. But let us flip the tables for a second. Imagine if we required this from banks that we have been bailing out. Have we had them go through “credit counseling” or have we required them to go through means tests? If anything, they have been given the money simply because they demanded it. For the consumer bankruptcy is the last option but for banks, the only option is a taxpayer funded bailout.

But as the times have gotten tougher in this recession, there really isn’t much a bank can do when someone has lost their job and is unable to pay their bills. By any standard, someone who has no money will fall below the median household income for that state. The average American household brings in roughly $46,000 to $50,000 per year so there isn’t much room to maneuver. With credit drying up, this was virtually the last lifeline. And banks refuse to lend because now after a decade of lax lending they are now verifying basic levels of capital and collateral:

Banks are holding tight to the funds because they want to avoid their own bankruptcy. Consumers are left to their own devices. As the year goes on, we can expect surging levels of bankruptcy creating further writedowns for banks. A $50,000 credit card debt that once was an asset for a bank can quickly turn into a loss when the borrower defaults. After all, some of this money might have been spent on food, medical costs, vacations, and other things that have no remedy of being recovered. The rise in bankruptcy is a key indicator that the economy is still feeling much pain.

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