Bankruptcy tells us a lot about the economy

Bankruptcy is useful for those who have made some bad investments and need to wipe the slate clean and start over. But they also tell us the state of the economy. The more bankruptcies should suggest a bad economy since more debt with too little income is the usual cause of bankruptcy. Whether it is small businesses, massive corporations, or individuals, a bankruptcy means the money is upside down and so much, so it’s better to put yourself at the mercy of the courts.

So, what does the American economy look like right now?

First, it’s worth pointing out some basic bankruptcy statistics. There were almost 800,000 bankruptcies filed in 2016. That number is significantly lower than the all-time high, which was in 2005 (not, as you might expect, 2009 or 2010), with two million filings. The 600,000 filings are about on par with 2006, which was the first year that the filings took a large decline.

Before that, from 1980 to 2005, bankruptcies were on a regular increase.

Nowadays, bankruptcies are far more likely to be filed by individuals than large businesses. This suggests the US economy is stable, although perhaps not in ideal shape. I say that because a very large percent of bankruptcies are due to one of the great economic problems of modern America: health care. As with so many other issues, bankruptcies are tied to the rising costs of health care. In 2005, that record high year, 46% of bankruptcies were due to medical bills.

Since then, other economic issues have also been on display. Those include instability in income (which might be expected from the Great Recession), job loss, and credit card debt. Divorce is also often cited but has less to do with the present discussion.

All of those issues are in fact very common anxieties for modern America.

So what can bankruptcies actually tell us about the overall economy? Perhaps only that the important issues elsewhere in the economy also inform the choice to declare bankruptcy. While the numbers are lower, it seems the causes remain stagnant. People are having trouble paying their medical bills. They are struggling to find jobs that pay what they need and that offer some stability. They owe too much on credit cards, and they can’t quite get back into the black.

Additionally, we can see by the number of individuals versus businesses that the business world is looking more stable than ever, even as individuals still struggle. This too matches our perception of the economy, where minimum wage and wage growth, in general, are hotly debated topics.

In conclusion, bankruptcies have a lot to tell us about the state of our economy. Some of that information is positive, but a lot of the underlying issues are, as expected, not so rosy.