After six consecutive years of double-digit percentage growth, personal bankruptcy filings showed signs of finally leveling off in 1992.
This is long-awaited good news for consumer lenders, who have lost billions of dollars in charged-off mortgage, auto, credit card, and unsecured personal loans over the past decade, some of it by people who appeared to have the ability if not the inclination to repay their debts.
Nevertheless, bankruptcies remain enormously high by historical standards. From 1984 to 1991, U.S. personal bankruptcy filings tripled, from 282,105 to 872,438.
In Good Times and Bad
That's an average annual increase of almost 30%. Filings jumped every year, no matter what the economic climate. This frustrated consumer lenders, who could no longer count on a strong economy to reduce their levels of bad debts.
Data from the U.S. courts show that personal bankruptcy filings rose to 900,874 in 1992, a modest 3.3% increase from 1991. Last year's increase was the smallest since 1985, when the rate was 5.6%.
The national personal bankruptcy rate - filings per 1,000 people - climbed to 3.58 at year-end 1992 from 3.49 at the end of 1991. By comparison, the filing rate was just 2.5 per 1,000 at the end of 1989.
Decline in Trouble Zones
There was an actual drop in personal bankruptcy filings in 1992 in areas with historically high filing rates.
Since 1989, the metropolitan statistical areas of Memphis, Birmingham, and Tuscaloosa, Ala., have consistently had the highest filing rates - several times higher than the national average.
The 11 metropolitan areas with the highest filing rates in the country are in just three states - Tennessee, Georgia, and Alabama - at almost double the national average.
In 1992, however, the 12 cities with the highest bankruptcy filing rates (all but one - Indianapolis - located in those three southeastern states) showed decline in both filing rate and the actual number of filings.
In addition, at the state level, Tennessee, Georgia, and Alabama each recorded substantial drops in filing rate and total numbers.
Some of the declines were modest, but a few were significant. Macon, Ga., with the fifth-highest bankruptcy rate in the country, recorded a 12.4% decline in filings in 1992, while Nashville and Atlanta, respectively No. 8 and No. 9, dropped more than 10%. Chattanooga, Tenn., No. 4, recorded a 9.8% decline in personal filings.
Among the states with the highest filing rates, Tennessee's was down almost 8%, Georgia's 10.5%, and Alabama's more than 6%. Population changes in these areas played no role in the reduced filings.
Financial Health Not Crucial
This good news is only part of the story. As SMR Research showed in a 1992 report, the highest filing rates are not necessarily found where economic conditions are bad.
Our study compared personal filing rates in all states and 330 metropolitan areas with unemployment and other economic indicators between 1989 and early 1992. There was no correlation between bankrupt filings and financial distress.
Tennessee, the No. 1 state in filing rate, was only 26th in unemployment. Thirty-five states had higher unemployment rates than Georgia, which nevertheless had the second-highest bankruptcy filing rate.
Memphis, the top major city in bankruptcy filing rate, ranked 173 out of 330 cities in unemployment rate. Tuscaloosa, the No. 2 city, was only 178.
None of these places had unusually high loan delinquency rates, either; many, in fact, were better than the national average.
The 1992 decline in places with chronically high bankruptcy rates should cheer lenders because these are the same areas, we feel, that have been most abusive of the system. Economic conditions in these places just do not warrant such high bankruptcy rates.
Other results from 1992 are less welcome. Personal bankruptcy filings continue to rise in key places - most notably, by 17% in California.
We are tempted to attribute that to the continuing recession there, but the state had higher than average bankruptcy filing rates even when its economy was more robust.
Also, northern states are showing markedly increased bankrupytcies, yet those states' filings per capita remain well below the U.S. norm. Filings in 1992 were up more than 20% in Delaware and Connecticut, more than 18% in Massachusetts, almost 16% in Maryland, more than 13% in New York and New Jersey, and more than 12% in New Hampshire.
Yet the worst of these states per capita - New Hampshire - experienced only 3.3 filings per 1,000 residents in 1992, still lower than the national average of 3.62.
Discrepancy in New England
In Connecticut, local banks and thrifts report aggregate consumer and residential mortgage loan delinquency rates that are nearly the worst in the nation, yet bankruptcy filings per capita are about one-third lower than the U.S. average.
Lenders have good reason to be perplexed. Economic logic alone has become a poor predictor of bankruptcy, which also implies that something may be lacking in predictive methods that are predicated on a consumer's past behavior without regard to his location.
What is driving bankruptcies, then? We believe that lawyer advertising plays a role, and so do local social norms and perceptions.
When someone files for bankruptcy and appears to come out unscathed, neighbors begin to wonder if bankruptcy is really so bad. It may, in fact, appear to be little more than a low-cost, government-sanctioned refinancing market.
Even within a state, filing rates differ wildly between cities. Yet within any given city, bankruptcy filing rates over time seem to show rather straight trend lines.
This suggests that where bankruptcy starts to become "trendy," it stays that way for quite a while. Where it is trending down, the movement is similarly gradual.
In New England, the trend is up, but steadily over time. In the highest bankruptcy places, the trend is down, but only to levels still much higher than average.
Whatever this might say about the bankruptcy laws or American society, it suggests that lenders should begin to. study the actual bankruptcy experience in localized places and use that track record to help predict what comes next.