The American consumer has proven strong in the face of generationally-high inflation, a slower job market, and economic uncertainty. However, a new report from subscription legal services company LegalShield is adding to the mound of evidence that things are awry in the economy.
The company’s Consumer Legal Stress Index shows that consumer legal stress has reached its highest point since Mar. 2020, climbing for the seventh consecutive month as the software company’s users seek help with bankruptcy, foreclosure, and missed loan payments.
Matt Layton, LegalShield’s senior vice president of consumer analytics, told TheStreet that the company fields about 150,000 requests for legal services online every month. This data is then organized anonymously to produce the index, which includes three separate indexes: the Bankruptcy Index, the Foreclosure Index, and the Consumer Finance Index.
“We found that it’s highly correlated to the Conference Board’s Consumer Confidence Index,” Layton says. “Our index actually leads their results from anywhere from 30 to 45 days.”
Not only that, but the two-decade old index has been shown to lead other indicators in other ways too. Layton says that spikes in the Bankruptcy and Foreclosure index tends to precede an increase in actual filings one to two quarters later.
That’s notable because bankruptcy-related inquiries jumped 14% year-over-year in the third quarter, while foreclosure inquiries rose 8.8% year-over-year.
“Folks don’t wake up in the morning and think, ‘I’m filing bankruptcy today,’ and run out and do it,” Layton adds. Instead, he says, people seek legal help to decide what to do about their rising pile of bills.
In many ways, this has been building, Layton says. “It almost feels like folks have been holding on for as long as they can and things are reaching a breaking point.”
He qualifies that the index has been strong for quite some time, only recently surpassing pre-COVID levels. A mix of stimulus, low interest rates, and a moratorium on student loan payments were among the biggest factors which kept the consumer on their feet in recent years as inflation ran rampant.
But with interest rates still generationally-high, Layton describes the surge in legal issues as a sort of credit normalization. Still, the levels seen in the index’s latest report are nowhere close to the levels seen during the Great Financial Crisis from 2007 to 2009.
LegalShield’s data is by no means exclusive. Over the last year, there have been plenty of signs that the consumer is experiencing stress, including cratering consumer confidence, falling credit scores, warnings from consumer-facing brands on their earnings calls, and surges in Google queries for economic-related searches like, “need a job” or “help with house.”
Many economists, traders, and politicians have chocked much of this up to the so-called “K-shaped economy”, which refers to the way in which economic outcomes have bifurcated for the top-earning households and the lower-income ones.
And while there’s no doubt that there is a difference in the experiences of the wealthy and less-fortunate, quantifying the problem has remained a precarious thing.
