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September bankruptcy filings were up by 12.4 percent over the same month of last year. Year-to-date total filings of 332,084 reflect a 16.6 percent rise above the first three quarters of 2022. Monthly increases over the previous year have been in the double digits every month of 2023 except for April when the increase registered at 9.1 percent. 

A Closer Look by Chapter

Chapter 7 (liquidation) filings rose by 12.3 percent over September 2022. This was the third consecutive month during which the chapter 7 filing rate increase slightly outpaced chapter 13s. This is due, in part, to the relatively lower chapter 7 increases for most of last year. It also may signal a normalization of historical filing patterns. 

Although the chapter 13 (wage-earner repayment plan) increase compared to the previous year was still in the double-digits, the 11.8 percent rise was the smallest seen during 2023. Given the hot pace of chapter 13 filings over the past two years, it is not surprising to see the rate of increase begin to moderate. Nonetheless, percent double-digit increases suggest that many consumers are having a tough time in the current mixed economy with historically high interest rates.                 

Chapter 11 cases rose by 40.5 percent compared to last September. That is lower than the recent increases, but points to significant business needs to restructure debt. Subchapter V small business filings increased by 22.1 percent, the smallest increase since March. Together, these data show that an increasing number of Americans are employed by businesses facing some financial distress.       

For more information about bankruptcy filing trends during the first three calendar quarters, AIS will soon post a short video that dissects these trends in more detail.

Impact of a Government Shutdown       

Although the risk of a government shutdown has been averted until mid-November, there certainly has been a lot of popular commentary in the news media about what a shutdown might mean for the American economy. John McMickle, AIS’s Congressional affairs expert, and I did a short video explaining some of the ins and outs of a shutdown. 

If past shutdowns are any indication, a temporary lapse in appropriations is unlikely to have a widespread impact on the national economy. As long as the major cash entitlements, such as social security, are paid on time, then there will be much inconvenience and even some hardship imposed on some. Still, it would take a while for bankruptcy filing rates or other economic measures to be appreciably affected.       

Lenders may have some customers – such as federal employees whose paychecks are delayed and businesses whose government contracts are placed on hiatus – who need special accommodations and a longer grace period on a monthly payment. After a few weeks, however, the chances for a greater impact will steadily grow.         

Let’s hope Congress can avoid a shutdown and agree on federal appropriations for the rest of Fiscal Year 2024, which runs between now and September 30, 2024. 

More on Student Loans       

As readers of the blog may recall, there has been a lot of controversy over the treatment of student loans in bankruptcy. Among other things, the Biden Administration modified the government’s litigation position to make it easier to discharge educational debt in bankruptcy. About a year ago, the Departments of Justice and Education unveiled new procedures whereby student loan debtors could fill out additional information about their financial situation. Government lawyers review that information and apply more relaxed criteria before deciding whether to support or oppose the debtor’s request to the bankruptcy court for a discharge on account of "undue hardship.”       

Thanks to a Freedom of Information Act request by a consumer advocacy organization and reporting by the New York Times, we finally have some data on the results of the new policy. Perhaps surprisingly, fewer than 45 debtors who took advantage of the new policy received a full or partial discharge. But hundreds more applications are in the pipeline, so the results might improve as time goes on.   

Bankruptcy courts have been issuing opinions more sympathetic to student loan debtors. But the Justice/Education policy had the advantage of expediting the process and encouraging student loan debtors to take advantage of the bankruptcy process. The new policy is not yet a year old, so the number of applicants may increase. 

Easing standards for determining "undue hardship” and thereby receiving a discharge is not a partisan issue. Under former Secretary Betsy DeVos, the Education Department began a rule-making process to make internal guidelines more lenient. 

With reports that student loan repayments will soon start taking $100 billion out of the economy, any signs that student loan debtors will file bankruptcy in greater numbers should be watched closely for the impact it could have on overall consumer filings. 

Interest Rates Remain Pivotal Factor

For several years, I periodically had lunch with a well-known New York-based financial advisor who helped steer corporate creditors and debtors through the chapter 11 reorganization and liquidation process. I heard a constant refrain from that industry leader that corporate bankruptcies would rise as soon as interest rates went up. His luncheon conversations proved prophetic.         

The doubling of interest rates over the last year or so has been accompanied by a dramatic increase in chapter 11 filings. As Eric Wallerstein of the Wall Street Journal recently reported, interest costs are taking an increasingly larger share of available cash of leveraged corporate borrowers. Banks are on the alert for even higher bank loan defaults.       

As many celebrate the Federal Reserve pause in interest rate hikes and anticipate stability, JPMorgan Chase CEO Jamie Dimon suggests more challenges just down the road. In a widely reported interview with the Times of India, the world’s best-known bank head said, "I am not sure the world is prepared for 7%” interest rates. (Marketwatch, September 26, 2023).

Conclusion              

Bankruptcy filing trends continue upward by double-digits. Chapter 11s continue to rise at an extraordinarily high rate that may not augur well for the national economy. At this point in 2023, it looks like filings will clearly exceed 400,000 this year and probably continue upwards next year. We will keep watching. 

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