With the number of bankruptcy filings now in for the first calendar quarter of 2023, we know that the rapid rise in the number of individuals and companies seeking bankruptcy relief continues unabated. From January through March of this year, 18.1 percent more bankruptcy petitions were filed compared to the same period in 2022. In March alone, overall filings increased by 17.5 percent. This is the eighth consecutive month of year-over-year filing increases. And there may be no looking back.
Bankruptcy Filings Under All Major Chapters
Total bankruptcy filings reached 42,552 in March. The growth in chapter 13 filings made up the majority the increase. Here is a breakdown by chapter: After plummeting due to the pandemic, chapter 7s began to rise last year, and now the pace of increases persists in the double digits. In March, chapter 7 filings jumped by 12.1 percent, likely validating predictions last year that the end of COVID-era cash assistance would lead to more bankruptcy filings.
The significant increases in chapter 13 filings continue unabated. In March, chapter 13 filings rose by 25.9 percent compared to last year. The size of the increases is surprising given the torrid pace at which chapter 13 rose throughout most of 2022 and into the current year.
Chapter 11 filings steeply climbed by more than 70 percent in March. The increase was somewhat inflated by one week, during which two debtors with many affiliates filed.1 But even considering those misleading numbers, chapter 11s are still on a steep skyward trajectory. Perhaps unexpectedly, small business Subchapter V cases remained steady but did not increase over last March’s number. Overall, chapter 11 filing numbers suggest that businesses are facing some significant headwinds and require a bankruptcy breathing spell to have chance to reorganize their debts and return to profitability.
The bar chart below shows the first quarter growth in overall filings.
The table below provides the chapter-by-chapter breakdown.
* Total bankruptcies include chapters 9, 12 and 15
Turbulence in the Banking Sector
On March 22nd, AIS posted a quick review of some consequences of, and questions posed by, the spectacular failures of Silicon Valley Bank and Signature Bank. During the intervening weeks, one major question was answered: the Federal Reserve decided to continue to increase interest rates. With warning signs of further financial turbulence, including a possible slow-down in lending as banks shore up their balance sheets and take other measures to avoid a run on deposits or regulatory action, consumers and businesses may have fewer ways to stay afloat and avoid bankruptcy.
Added to these negative economic signs, credit card and automobile loan delinquencies are way up, the commercial real estate market is nearing crisis, and American home values are past their peak. Easing inflation is a good sign, but prices are still rising at more than the Federal Reserve’s long-stated target of two percent.
While there remains hope of a soft landing and avoiding recession, the economy is in transition from the unsustainable growth of government spending and other emergency government action taken during the pandemic.
The upward trajectory in bankruptcy filings continues and shows no signs of reversal in the immediate future. Banks and other lenders are addressing increasing default risk in some portfolios. It is time to declare the pandemic era of free money over for both consumers and businesses. The bankruptcy system is designed to provide a lifeline for debtors and an efficient means for repayment for creditors. We may need it now more than at any time in recent memory.
1 As noted in previous bulletins, chapter 11 filing are subject to wilder fluctuations than other chapters, including because of the impact of affiliate filings. This was true even during the halcyon days of corporate filings when large businesses and retailers drove chapter filings to 7500 cases and more each year (e.g., Footstar, Inc.).
Commentary provided by Clifford J. White, Managing Director – Bankruptcy Compliance for AIS.