Bankruptcy and Natural Disasters

Journal Issue

Dec/Jan 2004

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<p><img src="/AM/images/letters/a.gif" align="LEFT" border="0" hspace="5" vspace="5">ugust and September were
traumatic months for the state of Florida, as it was hit by four hurricanes
in succession. On Aug. 13, Hurricane Charley made landfall about 100 miles
south of Tampa with winds as high as 145 miles per hour (mph), causing
tremendous damage as it crossed through the central part of the state.
Three weeks later Hurricane Frances landed on the east coast of the state,
just north of Palm Beach. As Frances slowly moved northwest across the
state, more than 6 million residents were left without power. Less than two
weeks later, Hurricane Ivan landed near the Florida-Alabama border,
bringing 130 mph winds. Ten days later Hurricane Jeanne landed at the same
spot as Frances had, bringing 120 mph winds.

</p><p>There were a series of massive evacuations prior to
the hurricanes' coming ashore, and widespread damage and power
outages afterward. Total insured losses in Florida from the four hurricanes
is estimated to be about $20 billion. More than one in five Florida homes
were damaged by the hurricanes.

</p><p>In this article we look at major natural disasters to
determine if they had a detectable impact on bankruptcy filing trends in
the area where they occurred. In general, we chose disasters that did a
great deal of damage in a state or particular judicial district, rather
than those with an impact that was spread through an entire region. Since
the simple fact that filings went up or down after a disaster doesn't
always reveal the whole story, we examined quarterly filing trends for two
years prior to the disaster, to see if there was a marked deviation from
the trend right after the event.

</p><h4>Hurricane Hugo</h4>

<p>This category 4 hurricane struck Puerto Rico and
South Carolina in September 1989. It caused $7 billion in damage—and
was the costliest hurricane in U.S. history up to that time. Charts 1 and 2
show bankruptcy filing trends in South Carolina and Puerto Rico before and
after Hugo.

</p><p></p><center><img src="/AM/images/journal/bbtnchart112-04.gif" alt="" height="327" width="500"></center>

<p>Filings in Puerto Rico had been increasing rapidly
well before Hugo. After Hugo, filings spiked upward for one quarter,
followed by a number of quarters of substantial increases, but at a lower
rate than before Hugo. South Carolina recorded modest increases in filings
for about a year after Hugo, followed by much higher increases in the
subsequent year.

</p><h4>San Francisco Earthquake, 1989</h4>

<p>The Loma Prieta earthquake struck during the 1989
baseball World Series, causing about $7 billion in damage including 1,500
homes destroyed and 22,000 damaged. Measuring 7.1 on the Richter scale, it
was the strongest earthquake to occur along the San Andreas fault since the
great San Francisco earthquake of 1906.

</p><p>Filings in the Northern District of California began
to increase at a modest rate in the year after the earthquake and increased
substantially in the second year after the earthquake. However, these
filing patterns were comparable to the other three judicial districts in
California that were largely unaffected by the earthquake.

</p><p></p><center><img src="/AM/images/journal/bbtnchart312-04.gif" alt="" height="327" width="500"></center>

<h4>Hurricane Andrew—Florida, August 1992</h4>

<p>This was a category 5 hurricane that slammed into
Florida, south of Miami, in 1992. Total damages were estimated at more than
$25 billion, and it remains the costliest single hurricane ever to hit the
United States. Nearly all of the impact in Florida occurred in the Southern
District of Florida.

</p><p>Bankruptcy filings in the Southern District of
Florida began to decline after Hurricane Andrew, tracking the national
pattern of declining filings that occurred at that time.

</p><p></p><center><img src="/AM/images/journal/bbtnchart412-04.gif" alt="" height="327" width="500"></center>

<h4>Midwest Floods of 1993</h4>

<p>Heavy spring and summer rainfalls in the upper
Mississippi River valley resulted in extensive flooding in nine states.
More than 16,000 square miles were underwater, and property damage amounted
to about $15 billion. This was the largest flood event in U.S. history.
Although nine states were affected by the floods, we limit our analysis of
bankruptcy filing trends to Iowa and Missouri, which were the most heavily
affected.

</p><p>Bankruptcy filings had been declining in both states
at the time of the floods, and continued to do so for the next year.
Increases in the second year after the floods were consistent with national
patterns.

</p><p></p><center><img src="/AM/images/journal/bbtnchart512-04.gif" alt="" height="325" width="500"></center>

<h4>Red River Floods, North Dakota 1997</h4>

<p>Heavy winter snowstorms led to massive spring
flooding along the Red River. This was the worst natural disaster in the
state's history, with 10 percent of North Dakota residents being
displaced by the floods.

</p><p>Around the time of the floods there were only about
500 cases filed per quarter in North Dakota. If the flood had caused even a
few hundred unexpected filings, the impact would be readily apparent in
Chart 7.

</p><p></p><center><img src="/AM/images/journal/bbtnchart712-04.gif" alt="" height="327" width="500"></center>

<h4>Hurricane Floyd, Eastern North Carolina, September 1999</h4>

<p>This was a fairly mild hurricane compared to the
others listed here, but its heavy rains caused about $5 billion in damage
to Eastern North Carolina.

</p><p>Filings in the Eastern District of North Carolina
continued to decline for six months after Hurricane Floyd. Subsequent
increases were consistent with national patterns.

</p><p></p><center><img src="/AM/images/journal/bbtnchart812-04.gif" alt="" height="326" width="500"></center>

<h4>Conclusion</h4>

<p>These data show that overall, there has not been a
strong relationship between major natural disasters and bankruptcy filings.
Generally, filing trends in a state or district keep on about the same
pattern as they were before the disaster.

</p><hr>
<h3>Footnotes</h3>

<p><sup><small><a name="1">1</a></small></sup> All views expressed in this article are those of the author and do not necessarily represent the views of the Executive Office for U.S. Trustees or the Department of Justice. <a href="#1a">Return to article</a>

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Journal Authors

Edward M. Flynn

Journal Date

Wednesday, December 1, 2004 - 12:00

Bankruptcy Rule

2004