OK, here’s the big news today, shouted from several breathless headlines: Bankruptcy Filings at Lowest Level in 20 Years for First Quarter of 2006!

Wow. You might think that statistic means the new bankruptcy law is actually working. The hoopla is over a report published by Lundquist Consulting showing that around 103,000 personal BKs were filed in January-March of this year, versus almost 382,000 for the same period in 2005.

There are two key points I want to make here:

First, total BK filings for 2005 were up more than 400,000 compared to 2004. And much of that increase came in the 3rd and 4th quarters of 2005, right before the new law went into effect. The simple fact is that hundreds of thousands of consumers filed for bankruptcy before the deadline, when they would otherwise have dragged their feet hoping to avoid it. I think we can safely assume than many, if not most, of those extra 400,000+ bankruptcies would have happened in 2006 if the new law had not been a factor. So the first quarter stats are basically meaningless. We’ll need a full year for the impact to be absorbed before we really understand the impact of the new law on the overall number of bankruptcy cases.

The same is true for the ratio of Chapter 7 to Chapter 13 filings. Right after the law went into effect, Chapter 13 cases jumped up to 60%, compared with an average of 29% in prior years. Now it’s down to the 40% territory, and will probably drop even further as the year proceeds. Again, that’s simply because anyone and everyone who could file Chapter 7 did it before the deadline.

The second point, which I have yet to see discussed in the financial media, is the “stealth bankruptcy” factor. What I call stealth bankruptcy is BK without the paperwork. People up against the new BK law will simply move without forwarding their address, dodge their creditors, and default on their obligations without the protection of the courts. I am certainly NOT advocating this approach, but given the tough new requirements it’s simply reality that many people will go this route. So even if the overall numbers for BK filings remain lower in 2006 versus 2004 or earlier (2005 will be a statistical anomaly), that will not mean fewer consumers in trouble.