The torrid pace of bankruptcy filings cooled a bit in March. Total bankruptcy filings for the month increased by 4.88 percent compared to the same month in 2023. This rise is modest when juxtaposed with the 22.32 percent year-over-year surge in February and the 17.6 percent overall increase observed throughout the previous year.
Intrigued by this shift, our team dug into the data and wondered, could the difference be related to the calendar? Perhaps. After all, there were two fewer business days this March compared to last year. Counting March’s average daily filings for two additional days would yield a year-over-year bump of 11.65 percent, which aligns more with the recent trends.
This nuanced analysis not only sheds light on the monthly fluctuation in bankruptcy filings but also underscores the importance of considering all variables to understand the broader economic landscape.
A Closer Look by Chapter
A significant majority of all filings are made under the liquidation provisions of chapter 7. Most of those filings are by consumers. After an extended period of skyrocketing filings, the rate of increase in March was a modest 5.14 percent over last March.
The second major consumer chapter of the Bankruptcy Code is chapter 13 which showed the first signs of what has become a very significant rebound in filings that began way back in 2021. It is possible that better employment prospects and stabilized interest rates on car and home loans is improving the lot of wage-earners. Chapter 13 went up by only 3.03 percent in March, which is the lowest increase since September 2021. But the loss of two work days would explain the slower growth rate.
Chapter 11, mainly business reorganizations, did not pause in registering the same level of high double-digit increases we have seen before. With a more than impressive 54.74 filing increase in March over the same month last year, there is no evidence to suggest a down-turn in chapter 11 filings any time soon. Until interest rates go down, many large and small businesses may continue to struggle at pre-pandemic proportions.
The number of small businesses who file under chapter 11’s subchapter V streamlined bankruptcy processes also continued skyward in March. As discussed below, many commentators suggest that a possible change in the bankruptcy law may accelerate subchapter Vs in the near term. The subchapter V filing increase in March of 47.26 percent is consistent with recent trends.
Other News that May Impact Filings
Here is a round-up of some major economic news of interest to creditors in March:
- Interest Rates: There was a strong correlation between the advent of interest rate hikes two years ago and the beginning of huge chapter 11 filings increases. Even though the Fed has signaled interest rate reductions down the road, interest rates remain high and businesses continue to file bankruptcy at break-neck speed. The Financial Times polled economists who now think the Fed will not cut rates until July at the earliest. (First FT, 3/18/24)
- Small Business Debt Limits: Recent news stories have attributed the increase in subchapter V small business filings to the looming expiration of the higher debt limits that were originally enacted during the pandemic. Absent Congressional action, the current $7.5 million debt limit will revert back to about $2.7 million in June. Subchapter V monthly filing increases have often exceeded 50 percent over the past year. If they continue go up much more, then we may have to call the increase a tsunami.
- Chapter 13 Debt Limits: In addition to subchapter V debt limits reverting back down to a much lower level in the absence of Congressional action, chapter 13 debt limits will also down-size significantly. Currently, the debt limit is approximately $2.7 million, and there is no distinction between secured and unsecured debt. Under the old limits, unsecured debt would be below $500,000 and secured debt below about $1.4 million. That could make the biggest different in high-cost housing markets. Small Business Credit Survey: In early March, the Federal Reserve published the results of its annual
- Small Business Credit Survey for 2023. The main take-aways are: "firms with debt are holding higher amounts,” with 39 percent holding debts above $100,000 compared with 31 percent in 2019; more than one-third of firm "reported that making payments on debt was a financial challenge,” and "[m]ore than half of all firms (54%) said that higher interest rates were contributing to increased debt costs.”
- Stock Market Returns: The Economist (3/2/24) ran an article titled "Problems on the horizon.” The magazine notes, "in addition to the usual doomsaying, a chorus of academics and market researchers argues that it will be tough for American firms to deliver the long-term growth required to reproduce extraordinary recent stock market returns.”
DOJ/USTP Projects
In March, the Justice Department’s U.S. Trustee Program unveiled its "FY 2025 Performance Budget – Congressional Submission.” The document reflects the President’s requested appropriations and contains, among many other interesting facts and analyses, official bankruptcy filing projections. For the USTP jurisdictions (which generally cover more than 90 percent of all filings), the Program projects 502,000 filings in Fiscal Year 2024 (October 1, 2023 – September 30, 2024) and 652,000 in FY 2025. That means the USTP projects an acceleration in recent trends and close to pre-pandemic normal levels next year.
Conclusion
Although bankruptcy filings are still rising, the rate of increase moderated significantly for the consumer chapters of the Bankruptcy Code. But that slow-down could be explained by the loss of two days. Even with that calendar anomaly, chapter 11 and small business filings continued their extremely rapid escalation. Is this the beginning of a change in trends or simply a temporary respite from the steep upward climb? Probably not. It seems to be statistical noise. But we will keep watching and listening.
Commentary provided by Clifford J. White, Executive Vice President – Bankruptcy Compliance for AIS.
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If banks and businesses hate surprises, February bankruptcy filing numbers may be welcome. The upward trend in filings continued. Not only that, but the pace of increase accelerated.
A comparison of overall filing numbers for February 2024 compared to the same month last year shows an increase of about 22.3 percent. That outpaces the annual increase last year of 17.6 percent. This is a Leap Year, so February includes one more day of filings, but that does not appreciably change the picture. Of note, the 3,755 daily filing total on February 29th represented the highest daily filing total since August 2020.
A Closer Look by Chapter
The most significant number of filings occurred in chapter 7 liquidations. In February, chapter 7 filings rose by 23.2 percent over the same month in 2023. Until mid-last year, chapter 7s were increasing, but at a less robust pace than chapter 13 repayment plan cases. Most consumer debtors file under chapter 7 because they get a discharge of their debts quicker and without making any repayment.
Chapter 13 filings were outpaced by chapter 7s, but they still rose by a very robust 17.9 percent. That compares to a much smaller increase in January. Consumers often file under chapter 13 because they usually get to keep their house or car, which may be sold in chapter 7.
Chapter 11 filings more than doubled in February 2024 compared to last February. The increase was an eye-popping 133.1 percent. Monthly variations in chapter 11 filings, usually business reorganizations, can vary widely from month to month. Nonetheless, it is remarkable that we have seen triple-digit increases several times over the past year. Even though big cases filed with multiple affiliated companies account for a material part of the increase, the rapid rise in the number of chapter 11 cases has been persistent over many months and the rate is jarring.
Within chapter 11, the number of small businesses filing under subchapter V jumped by a spectacular 75.4 percent above last year.
Adding all chapters together, the 22.3 percent jump means the filing rates are getting closer to the pre-pandemic norms. Although filings remain more than one-third below the pre-pandemic rates, they are catching up fast. Last year at this time, bankruptcy filings lagged pre-pandemic levels by about 45.9 percent.
More Developments on Student Loans
After being thwarted by the courts in its most ambitious efforts to cancel student loans, the Biden Administration took two more steps in February to reduce the burden of student loans.
First, the U.S. Department of Education unveiled a rulemaking that will be open for public comment in May. The plan is for the Education Department to waive collection on federal student loans taken out by borrowers who would suffer "hardship” if forced to repay. Depending on court challenges and how the 17 factors for determining hardship are applied, potentially millions of borrowers may be affected.
Second, the Administration commenced cancellation of $1.2 billion in student loans to 153,000 borrowers who have been repaying student loans for ten years and meet other requirements.
These are two of the multiple efforts made by the Biden Administration to wipe out student loan debt. A year-old plan to soften the government’s traditionally severe litigation position to deny discharge of student debt has been slow to bear results. Changing collections policy in bankruptcy court could invite a lot more bankruptcy filings. In contrast, the new initiatives to outright eliminate student loan debt would have the opposite effect.
Economic Factors at Play
Here are some updates on economic factors that may influence bankruptcy filings:
- Commercial Real Estate in Trouble: The bust in office building values and rise in vacancies is becoming more apparent. Although not nearly as ominous as the mortgage meltdown, which precipitated the Great Recession of 2009, increased attention is being paid to that $20 trillion market. Bloomberg (2/14/24) quoted Treasury Secretary Yellen saying the situation remains "manageable,” but other experts expect more troublesome consequences.
- Consumer Debt and Delinquencies Headed Higher: Both consumer debt, which recently hit an all-time high, and the national debt, which seems to break new records every second of the day, may pose increasing difficulties. In February, the Federal Reserve Bank of New York released data showing household debt continuing to climb in the fourth quarter of 2023. Delinquencies rose in most categories. Previous reports showed that subprime borrowers were leading the alarming trend.
- Consumer Lending Down: As consumers face more difficulty in repaying, Bankregdata.com (2/7/24) analyzed recent data to conclude that credit scores were inflated because of the financial good times made possible for government pandemic assistance. In turn, those inflated credit scores led to excessive lending that is resulting in higher delinquencies. As a result, consumer lending began to decrease. Some commentators, however, think that the contraction in lending may be over. (AP News, 2/29/24, via ABI)
Conclusion
Bankruptcies are up at a steady clip, exceeding the rate of increase last year. Although the economy may have a "soft landing” from the pandemic, there are warning signs that may direct bankruptcy filing rates higher for quite a bit longer. So, what’s the good news? There were no big surprises in February.
Commentary provided by Clifford J. White, Executive Vice President – Bankruptcy Compliance for AIS.
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In January 2024, bankruptcy filings significantly increased, totaling 36,623 cases. This represents a 17.53 percent rise compared to the same month last year, closely aligning with the annual increase rate of 17.64 percent observed in 2023. The increase was observed across all chapters of bankruptcy filings, indicating a broad-based growth in these cases. Moreover, the gap between the number of cases filed before and after the pandemic continues to narrow, reflecting a changing landscape in bankruptcy trends.
A Closer Look by Chapter
The number of chapter 7 filings went up by 22.56 percent in January. With some variation, the rate of increase in chapter 7s generally accelerated throughout 2023. That acceleration continued unabated in January. In fact, the hike in chapter 7s was more than double the rise in chapter 13s, which is the other major chapter under which most consumer debtors file.
Chapter 13 repayment plan cases rose by double digits. However, the 10.79 percent filing increase over the same month in the previous year was the smallest increase since December 2021. Chapter 13 filings began a steep climb upwards more than two years ago, but the pace of increase moderated a bit in the later months of last year. That moderation persisted at the start of this year.
Although both chapter 7 and 13 filings were up significantly to start this year, the growth rate in chapter 7s does not always provide a proportional rate of return to creditors. About 95 percent of chapter 7 debtors have no home equity or other non-exempt assets that a trustee can liquidate to repay creditors. In contrast, chapter 13 debtors are generally allowed to keep all their assets in return for paying their disposable income to creditors over five years. Unless the number of chapter 7 cases with assets grows, the overall rise in cases may not yield significantly more dividends. The relationship between chapter 7 and 13 filings bears watching in the months ahead.
Chapter 11 cases increased by 30.0 percent. Chapter 11 filing numbers tend to fluctuate greatly, so the main lesson from January is that business reorganizations continue to rise, albeit at a slower rate than the 69.06 percent explosion seen last year. Given the traditional volatility in chapter 11 filings, the January percentage increase tells us very little about the magnitude of increase we may see in the coming year.
Small business filings under subchapter V jumped by 45.9 percent, a tad above the 41.59 rise seen over the twelve months of 2023. Large and small businesses continue to flock to the bankruptcy courts in search of debt relief.
As reported by AIS in a webinar held on January 14th, temporary extensions of the higher chapter 13 and subchapter V debts limits expire this June. If Congress does not extend those enhanced limits again, the number of overall bankruptcies may drop slightly. Also, more consumer debtors may choose chapter 7 if they no longer qualify under the lowered chapter 13 maximum debt levels.
News that May Affect Bankruptcy Filings
Those who watched the webinar also saw many charts with economic information that moved in different directions. Our bottom-line conclusion was that neither the data nor expert commentary provided a strong basis for expecting that bankruptcy filing rates would change direction in 2024. The January filing statistics support that conclusion.
Here are a few additional headlines with our commentary that provide more evidence about the mixed picture of the national economy:
- "Credit Card Debt Is Up – and It’s Taking Longer to Pay Down” (WSJ, 1/24/24): This article was one of many last month about the growth in credit card spending. Reporter Angel Au-Yeung found that "Credit card loans, or unpaid balances on accounts, jumped 14% at JPMorgan compared with a year earlier and 9% at Bank of America. Credit card loans were also up at Citigroup and Wells Fargo.” The story goes on to say that "consumers today are fine . . . .” AIS Infosource shared numbers at the webinar showing subprime customers are defaulting at higher rates. These data bear close watching.
- "Your Evening Brief: Markets Slide After Fed Tamps Down Rate-Cut Talk” (Bloomberg, 1/17/24): Reporter Margaret Sutherlin reports that "Investors want an interest rate cut. The Federal Reserve isn’t so sure the economy needs one yet. And now traders are throwing a tantrum.” After the Fed suggested a couple of months ago that it may be time to reduce interest rates in 2024, consumer spending went up, but now Fed officials.
Commentary provided by Clifford J. White, Executive Vice President – Bankruptcy Compliance for AIS.
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Bankruptcy filings in Calendar Year 2023 ended with another bang. After three years of plummeting filings, the number of bankruptcies climbed at a rate that few predicted. All told, 445,119 individuals and businesses sought bankruptcy protection last year.
For the entire year, filings under all chapters increased by 17.6 percent. The rate of growth accelerated as the year progressed. Last month, total filings were 16.1 percent higher than in the previous December. In only one month of 2024 did filings not rise by double-digits. The consumer chapters of the Bankruptcy Code (chapters 7 and 13) experienced double-digit increases once again, with chapter 7s leading the way. Chapter 11 reorganizations continued to rocket skyward, including small business cases.
All this may result in another run-up in filings during the New Year.
A Closer Look by Chapter
Chapter 11 cases continued their phenomenal trend in December by increasing by 78.3 percent compared to the same month last year. Among those cases are subchapter V small businesses, which rose by 68.9 percent. For the entire year, chapter 11 filings increased by 69.1 percent, including a 41.6 percent rise subchapter Vs. Those eye-popping numbers may reveal a deep problem in the commercial environment that requires attention from policy-makers.
The number of chapter 7 liquidation cases increased by 18.4 percent in December, maintaining a high pace of filings that picked up steam in the middle part of the year. The overall annual increase in chapter 7 filings was 15.6 percent. For reasons discussed many times in this space, when government largesse dried up last year, a large number of consumers without equity in property exhausted their savings and needed a fresh financial start without the cash subsidies provided throughout the pandemic.
Chapter 13 wage-earner repayment filings went up significantly as well. Compared to last December, chapter 13 filings were 11.6 percent higher than in the same month of 2022. In contrast to chapter 7 filings, the number of chapter 13 bankruptcy petitions moderated mid-year, but continued to rise significantly in every month of 2023. The growth in chapter 13 filings raced ahead of chapter 7s for two years but appears now to be returning to more normal filing patterns.
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Clues to 2024 Filing Trends
The biggest economic news at the end of 2023 was not the Federal Reserve’s decision to keep interest rates at their 22-year high but statements by Fed officials that interest rates may be cut by as much as 0.75 percent through gradual reductions this year. That would still leave interest rates sky high by recent standards, but the prospects of loosened monetary policy has led to a boomlet in stock prices. According to a headline in the Wall Street Journal (12/28/23), "Rate Cuts May Offer a Lifeline for Highly Indebted Companies” and at least delay the day of reckoning.
The official Fed statement after its December meeting was silent about future reductions. Some economists also are cautious about predicting future cuts. The Economist magazine (12/16/23) expressed concerns about triggering higher inflation, which is still significantly above the Fed’s target of two percent. In an interesting piece printed in the Creditor Corner (12/17/23), Bruce Richards, CEO of Marathon Asset Management, said that the market may be overly optimistic about "how much the Fed will lower its funds rate in 2024.” A news article written by the Wall Street Journal’s Nick Timiraos even pointed out that the Fed was "careful not to rule out higher rates.” (12/13/23)
But let’s assume that interest rates are cut in the spring or early summer. Chapter 11 bankruptcy filings began their steep climb upwards only a couple of months after the Fed began its tight money policy less than two years ago. Even with rate cuts, the costs of borrowing or refinancing will not be cheap. Any impact on bankruptcy rates may require a long and sustained downward track on interest rates.
Consumer cases may be even more impervious from the effects of modest interest rate reductions. As documented many times in this space, chapter 7 filings rose after the unprecedented flow of federal cash and other relief receded in 2022. As shown in the December figures, the rate of chapter 7 filings gained strength in the latter part of 2023, and unsecured borrowing returned to historically high levels.
Chapter 13 filing rates may be more susceptible to interest rate changes because wage-earners sometimes can avoid bankruptcy by refinancing their homes. But filings under chapter 13 were the first to move upward in the latter part of 2021, and the rate of increase, while still high, has slowed as the shock of high interest rates and reimposition of foreclosures has factored into homeowners’ financial planning.
Overall bankruptcy filings may be expected to increase significantly in 2024. But we will keep a close watch on interest rates, especially how they may affect chapter 11 business cases.
Conclusion
Bankruptcy filings in Calendar Year (CY) 2023 ended with another bang. After three years of plummeting filings, the number of bankruptcies climbed at a rate that few predicted. Consumers and businesses have experienced much distress over the past year. Unless economic conditions change, which the Federal Reserve has tried to do in some past election years, be prepared for one-half million filings over the coming year.
Commentary provided by Clifford J. White, Executive Vice President – Bankruptcy Compliance for AIS.
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- Automation and Technology: Leveraging specialized technology solutions can automate processes, track key milestones, and streamline operations, enhancing overall efficiency.
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Total bankruptcy filings increased by 21.5 percent over the same month last year. This reflects a continuing trend we have seen during all of 2023. In ten out of the eleven months this year, we have observed double-digit percentage increases in filings compared to the same month previous year. So far this year, total filings are up by 17.8 percent. We have not experienced such a sharp upward spiral since the country emerged from the economic meltdown of 15 years ago.
A Closer Look by Chapter
For the third time this year, chapter 11 reorganization filings more than doubled over the same month last year. It is not much of an exaggeration to say that the increase in chapter 11 filings is of almost epic proportions. Chapter 11 filings in November 2023 were an incredible 152.1 percent above those in November 2023. Such spikes are often due to a few mega-filings involving a large number of affiliates. The number of small businesses that filed under Subchapter V went up by a hefty 72.5 percent, showing that the business distress is not confined to a few over-leveraged retailers or commercial real estate giants but is more pervasive.
Continuing with the same old theme you have read here before, chapter 7 liquidation cases skyrocketed once again by 20.3 percent. Those facing higher prices (remember: slowing inflation does not mean prices are dropping) and a higher cost of debt (interest rates have stabilized at a 22-year high) are feeling a squeeze like they have not felt for many years. There is no way to sugar-coat the financial anxiety facing those who lack economic security during a time of adjustment for the national economy. For those who are still just making it, the Christmas Season will likely push many of them over the abyss. Their bankruptcy filings will begin to appear in the latter part of the first quarter of 2024.
Chapter 13s went up by 19.4 percent. There has been a steady rise in chapter 13s for more than two years, so continued increases are unsurprising. Down the road, rt will be interesting to see if improved employment numbers, combined with the persistently high interest rates and cost-of-living, cause another surge in bankruptcy filings by homeowners (who have few refinancing options these days) or if the steady upward trend continues.
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Other Economic Signals Worth Watching
- Small Businesses: The Wall Street Journal Pro ran an interesting piece about interest rates on small business loans exceeding nine percent. According to the story, "[w]ith borrowing costs double their levels from just two years ago, many small businesses are pulling back, another sign of how higher interest rates are cooling the economy.” [WSJ Pro, 11/14/23]
- Interest Rate Moves: Just as some economists were beginning to hold out hope of a modest decrease in interest rates in 2024, along came JPMorgan Chase CEO Jamie Dimon to throw cold water on that kindling hope. According to Mr. Dimon, interest rates may reach 7 percent before the Fed is done raising rates, "inflation is hurting people” and may go higher, the world situation is dangerous, and a recession is still possible. [CNN.com, 11/29/23] Mr. Dimon has been somewhat more pessimistic than other financial mavens over the past couple of years, but his straight-talk continues to command attention and merits careful consideration.
- Student Loans: The Biden Administration’s efforts to make bankruptcy a more viable option for student loan borrowers in dire straits does not seem to have led to more filings. As reported here earlier, the Justice Department and Education Department softened the criteria by which they would oppose the discharge of student loans. However, only 632 borrowers have applied under the new process. With payments now coming due after a long hiatus, however, the pressure on student loan borrowers may rise in the coming months. [WSJ, 11/16/23]
In addition to the student loan payments coming due for 1.4 million borrowers, many of these debtors also bear the weight of other high credit payments. According to a study by Transunion and Boston Consulting Group, those owing student loans "could become seriously delinquent” on credit cards and other loans. [Bloomberg News, 11/15/23]
Conclusion
Peeling away all the static and we are in the closing stretch of 2023 with bankruptcy filings going up even faster than earlier in the year. The economic dynamics leading to these increases do not show signs of abating, even if interest rates and the cost-of-living stabilize. Lenders will require a lot of skill in managing a higher number of defaults and customers who may believe they have alternatives , except for bankruptcy, to protect themselves and their families.
Despite the challenges, may all who read this blog have a Joyous Holiday Season!
Commentary provided by Clifford J. White, Executive Vice President – Bankruptcy Compliance for AIS.
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The brisk upward pace of bankruptcy filings accelerated in October by rising a very hefty 24.3 percent over the same month in 2022. This month’s bankruptcy filings rose faster than they have since 2009. The increase in chapter 11 filings was stunning by registering a 112.2 percent increase over last October. Bankruptcy professionals will prosper from these increased numbers, but they may portend acute challenges for both business and consumer lenders.
A Closer Look by Chapter
By far, the most significant percentage filing increase occurred in chapter 11. After rising by more than 40 percent last month compared to September 2022, the October filing increase rocketed up and more than doubled! That is the second time this year that chapter 11 filings doubled from the same month in the previous year. Part of the increase was due to big cases with several separately incorporated entities, such as Rite Aid drug stores. The run-up in chapter 11 filings this year reflects a significant upward shift in the overall pattern. More thoughts on what that means are found below.
Chapter 7 liquidation cases climbed by a very steep 27.97 percent. Chapter 7s historically account for upwards of two-thirds of all filings, so the recent acceleration in chapter 7 filings is certain to generate an end-of-year filing number that significantly exceeds most prognosticators’ previous expectations.Chapter 13s rose by 17.42 percent. The continued pace of increase in chapter 13 repayment plan cases is all the more impressive because chapter 13s began rising in 2021, well before filings under the other chapters of the Bankruptcy Code. The need for chapter 13 relief by distressed consumers who carry secured debt on their homes and cars shows little sign of cooling.
Macroeconomic Factors Continue to Fuel Filings
As reported previously, the rise in interest rates is likely the strongest factor in bankruptcy filings. Even though other economic data have been mixed, rapidly rising interest rates for over a year have sharply increased the costs of auto loans and other big-ticket consumer items. As household and corporate budgets tighten, borrowers cannot put off the day of financial reckoning by borrowing more. As pandemic-era government cash assistance dried up, many individuals turned to credit cards. Companies that require frequent borrowing have faced speed bumps that make it harder to refinance old debt that is coming due or to take out new loans for business expansion.
On October 24th, Federal Reserve Chair Jerome Powell gave a telling speech at the Economic Club of New York. He said that "inflation is still too high”, and the Fed governors remain "united in our commitment to bringing inflation down sustainably to 2 percent.” He noted that a continued strong labor market "could warrant further tightening of monetary policy.” A few days later, the Fed held interest rates steady, and Chairman Powell softened his words to suggest that interest rates may hold at the current rate in the immediate future. (A subsequent jobs report showed a cooling economy. That would further signal that interest rates may remain steady for a while longer.)
Even though interest rates remain high, many consumers are going deeper into debt. A Federal Reserve Statistical Release shows that revolving credit (e.g., credit cards) increased in August at an annual rate of 13.9 percent. Increased borrowing – especially when consumers max out on their credit cards – ultimately leads to higher bankruptcy filing numbers.
As further proof that interest rates are a pivotal factor in pushing up the number of bankruptcy filings, let’s look at a few headlines from the financial press:
"America’s consumer-debt stress is mounting – mortgage rates top 7%, credit card liabilities hit $1 trillion, and now auto-loan defaults are on the rise” (Business Insider, 10/25/23) – the story cites automobile loan defaults rising above pre-pandemic levels.
"U.S. Economy Grew a Strong 4.9%, Driven by Consumer Spree that May Not Last” (WSJ, 10/26/23) – the reporter quotes economist Andrew Hunter saying, "higher rates and various other headwinds [will] start taking a bit more of a toll.”
"Zombie firms are filing bankruptcy as the Fed commits to higher rates” (CNBC (via the American Bankruptcy Institute), 10/31/23) – this means that "unprofitable businesses that stay afloat by taking on new debt” are out of options and need to seek bankruptcy relief.
Conclusion
October bankruptcy filings continued upward at the strongest pace we have seen in fourteen years. Total bankruptcies will remain below the half-million mark for this calendar year, but the current trajectory suggests the same upward path next year. Absent changes to interest rates, the die may be cast for the foreseeable future. With hot spots around the globe turning hotter, the chances for better economic conditions do not seem bright. That only solidifies an expectation of high growth in loan defaults and bankruptcies.
Commentary provided by Clifford J. White, Managing Director – Bankruptcy Compliance for AIS.
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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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Outsourcing certain back-office processes can give auto lenders a considerable edge. However, not all service providers are made equal. When looking externally for bankruptcy process management support, it's essential to find a servicing partner that understands the operational and compliance challenges associated with the bankruptcy system. Here's what to look for:
- Years in Service: An established provider, like AIS, that boasts over 20 years of experience, can provide you the assurance of a tried and tested partnership.
- Wide-Ranging Services: A provider should be well-versed in end-to-end servicing—from notification of new filings to court document preparation and filing to legal support and post-bankruptcy- services.
- Automation: Modern service providers should leverage bankruptcy servicing technology to enhance their offerings. By developing RPA and workflow automation tools, AIS has significantly increased efficiencies with account onboarding, proof of claim filing, litigation management and account closings.
- Innovation: A forward-thinking provider will have systems that transform legacy processes, leading to better compliance controls.
- Affordable yet Quality Service: Reducing operating costs without compromising quality is crucial. Providers like AIS blends technical automation with low-cost, high-quality labor maximize your return on investment.
- Efficiency Optimization: Look for firms that not only manage tasks but also actively seek ways to optimize efficiency, giving you more bang for your buck.
- Risk Mitigation: Especially in the realm of bankruptcy, mitigating risk is front and center. Ensure that the provider is equipped with tools and expertise to enhance compliance.
- Quality Control: The best service providers will always prioritize quality control and compliance to adhere to client-required service levels and critical-to-quality metrics.
- Customized Solutions: Each auto finance organization has its own unique needs. A bankruptcy servicing partner should be able to tailor its processes, procedures and performance to mirror those of the client.
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In today's dynamic business landscape characterized by shifting markets, rigorous regulatory standards, and economic challenges, maintaining a competitive edge is paramount. Business Process Outsourcing has emerged as an effective lever for companies to pull, ensuring streamlined operations and consistent growth.
Strategic Solutions for Modern Challenges
Adapting to the challenges of the modern business environment requires strategic allies. These partnerships help navigate economic fluctuations, regulatory intricacies, and market unpredictabilities. With tailored outsourcing solutions, companies can ensure prompt delivery of high-quality services at optimized costs.
Harnessing the power of software robotics combined with specialized human expertise, routine operations within sectors like loan servicing and default legal can be adeptly managed. This frees up companies to direct their focus and resources on core growth initiatives.
Blended Delivery: The Edge in Efficiency
A distinctive blended delivery model, centered around Dallas-based personnel, offers an innovative approach. Adopting unit and FTE pricing models can lead to significant payroll cost savings, with potential reductions of up to 50%. Beyond mere cost benefits, this model supports businesses in smart resource utilization, enabling the rollout of value-centric programs seamlessly.
Process Engineering: The Pathway to Operational Excellence
A systematic approach to process engineering can make all the difference:
- In-depth Analysis: Beginning with a thorough review of existing business processes creates a solid foundation for optimization strategies.
- Risk and Efficiency Assessment: Expert teams can pinpoint inherent risks and highlight efficiency opportunities within any process.
- Strategizing for Enhancement: Based on the analysis, bespoke transition plans are designed, targeting operational excellence.
- Lean Six Sigma Expertise: With accredited certifications, experts play a critical role in refining processes, eliminating redundancies, and embedding value-driven tasks.
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The mortgage industry is not just about lending and borrowing; it thrives on precision, timely decisions, and seamless operations. In our ever-evolving digital landscape, the challenge for many mortgage organizations lies in mastering cost efficiency, ensuring high-quality services, and scaling operations. Outsourcing has emerged as a powerful strategy to address these challenges, and here's why:
1. Leveraging Data & Analytics for Informed Decisions:
In an era where data is the new oil, access to market-leading databases can provide an unparalleled edge. This is not just about quantity but quality. Comprehensive databases that are continually updated serve as bedrocks for critical business decisions. Whether your processes require bankruptcy information or deceased data solutions, the right kind of data aggregated from authentic sources, like direct connections to the Federal Bankruptcy Court System, can set a firm apart. The key lies in the precision of data matching and the ability to integrate this data seamlessly into existing systems, giving businesses the intelligence they need.
2. Embracing Modern Technology & Automation:
Automation and technology are no longer mere buzzwords; they are requisites for operational excellence. Outsourcing partners that invest in technology hubs, like those in Gurugram, tap into a rich vein of IT talent. Incorporating innovations such as robotic process automation and artificial intelligence can streamline operations, reducing human errors and cutting costs. Moreover, cloud-enabled database solutions and workflow-based software applications can enhance operational speed and safety.
3. Staffing & Workforce Optimization – The Right Talent at the Right Price:
In the face of talent shortages and rising salaries, workforce optimization is the need of the hour. Outsourcing offers a solution, with the potential for cutting payroll costs significantly. The blend of expert talent and automation solutions can increase efficiency and reduce operational costs across various business functions. Moreover, integrating robotic process automation in mundane tasks ensures that businesses can focus on the bigger picture.
4. Meeting Stringent Legal and Compliance Requirements:
The mortgage industry is heavily regulated, making legal and compliance acumen indispensable. Innovations in legal processes and technology can not only drive down costs but also expedite legal proceedings. The key is to blend personal services with technology, ensuring compliance while emphasizing cost control. Tools like web-based applications for court filings can revolutionize traditional legal processes, increasing efficiency and transparency.
5. Committing to Operational Excellence Through Quality Management:
Quality assurance is the backbone of any successful business operation. Incorporating visual management systems can provide insights into daily operations, ensuring a high standard of work. Outsourcing partners that prioritize operational excellence and transparent reporting can ensure a consistent accuracy rate, bolstering client trust and satisfaction.
As the mortgage industry continues to evolve, embracing the trifecta of cost, quality, and scale becomes imperative. Outsourcing partners that offer a blend of data analytics, technology, and quality management can assist businesses in navigating this complex landscape, ensuring sustained growth and success.
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The mortgage industry, with its intricate layers of finance and strict regulatory landscapes, operates within a framework where accuracy is non-negotiable. Whether you're a boutique mortgage servicer or an industry giant, risk management, due diligence, and audits are the cornerstones that ensure smooth operations and compliance. Let's delve into why these components are so crucial in the world of mortgage.
1. Importance of Risk Management
Mortgages, by nature, involve a vast sum of money and extended timelines. These two factors, combined with the variable dynamics of the financial market, present substantial risks.
Mitigation of Financial Risks: Fluctuations in interest rates, market instability, or changes in borrower's financial status can impact the profitability of a loan. Risk management practices help lenders anticipate these changes and make informed decisions.
Protecting the Reputation: A bad loan doesn't just translate to financial loss but can tarnish a lender's reputation. Effective risk management can prevent these pitfalls and help maintain a company's integrity in the market.2. The Role of Due Diligence
In the mortgage world, due diligence is the series of assessments and verifications made before sealing a deal.
Verification of Documentation: From checking the borrower's financial status to ensuring the authenticity of property documents, due diligence assures that all paperwork is in order.
3. Why Audits are Crucial
Regular audits are essential to ensure that all the processes, right from loan origination to closure, adhere to the regulatory and internal guidelines.
Ensuring Compliance: Regular audits help lenders keep in sync with the ever-evolving regulatory landscape, ensuring they remain compliant and avoid penalties.
Quality Assurance: Audits identify gaps in the process, ensuring that quality isn't compromised at any stage of the mortgage lifecycle. They play a pivotal role in maintaining the accuracy and integrity of financial operations.
Evolving with the Times
With the advent of technology, the mortgage industry is experiencing a shift. Automation and advanced software tools are reshaping how risk assessment, due diligence, and audits are conducted. However, the fundamental principles remain unchanged. Embracing these cornerstones, while integrating the latest technological advancements, ensures that lenders can sail smoothly in the volatile seas of the mortgage industry.
The complexities of the mortgage industry necessitate a meticulous and systematic approach. With risk management, due diligence, and regular audits serving as the foundation, lenders can ensure streamlined operations, compliance, and sustained growth. For those keen to delve deeper into these principles at work, explore our real-world case studies:
- Producing Quality Work on Tight Deadlines
- Integrating Automation to Meet Regulatory Requirements
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The already significant growth in bankruptcy filings continued unabated in August. Overall, bankruptcy filings rose by 17.60 percent compared to the same month in the previous year. There were steep rises across all major chapters. August was the 13th consecutive month with an overall filing increase. With double-digit monthly increases the norm for so long, a new question is posed: Are bankruptcies just rising or it is more accurate to say they are exploding?
Chapter-by-Chapter Breakdown
Chapter 7 (liquidation) filings rose by a robust 19.1 percent over August 2022. For the second consecutive month, chapter 7s rose by more than chapter 13s (wage-earner repayment plan). Historically, upwards of two-thirds of all bankruptcies are filed under chapter 7, so a large uptick in chapter 7s means that overall filing increases will also accelerate significantly.
Chapter 13 filings continued their upward spiral and increased by 14.3 percent compared to the same month last year. More than a year ago, chapter 13 indicated that filings were rebounding. Chapter 13s started climbing as soon as restrictions on foreclosures were lifted, and more homeowners needed relief to avoid eviction.
Chapter 11s, consisting mainly of businesses in need of financial reorganization or a sale to pay creditors, rose by an alarming 56.4 percent compared to August 2022. Given the sustained high double-digit increases each month, the continued upward spiral may signal economic troubles that will trickle down to consumers who will fuel an on-going acceleration in overall bankruptcy filings.
Small businesses filing under subchapter V spiked by 36.4 percent compared to the same month in the previous year. Both overall chapter 11s and Subchapter Vs have gone up in 11 of the past 12 months – by a lot. The temporary extension of the subchapter V debt limits from $2.7 and $7.5 million expires next June. If it begins to appear that Congress may balk at extending the higher eligibility limits, it will be interesting to see if the number of small businesses seeking the debtor-friendly subchapter V process booms even more as we get closer to the deadline next year.
Economic Trends to Watch
There is increasing attention to consumer debt and delinquencies. Concerns have been mounting for several months, and recent data provide flashing warning signs. Credit card debt has reached pre-pandemic levels (topping one trillion dollars!), and auto loan delinquencies have soared to pre-pandemic levels as well. Even if inflation eases, the run-up in prices on just about everything, plus high interest rates not seen since the turn of the century, put many consumers in a precarious position.
A few newspaper headlines may sum it all up: "Delinquencies Rise for Credit Cards and Auto Loans, and It Could Get Worse” (Washington Post, 8/30/23); "Car Prices Might Be Unsustainable for Buyers” (Wall Street Journal, 8/21/23); and "Why the Era of Historically Low Interest Rates Could Be Over” (Wall Street Journal, 8/20/23).
As noted here previously, the heavy burden of student loan debt will become more apparent this fall as the repayment hiatus ends. Research now shows that student loan borrowers ran up other debts during the pandemic that they may not be able to afford once they start sending in their regular payments on student loans. After being rebuffed by Congress and the Supreme Court on earlier efforts to extinguish more than $400 million in student loans, the Biden Administration is now pursuing another avenue by adjusting repayment terms that it says will cut student debt for 3.4 million borrowers.
A Final Thought
I was pleased to speak at the National Association of Bankruptcy Trustees annual convention held last month. Getting back together with the case trustees, who are appointed and overseen by my former office in the Justice Department, reminded me how important they are to the bankruptcy system. Debtors and creditors alike should appreciate the trustees’ diligence and hard work in applying complex bankruptcy requirements in a way that protects debtor rights and maximizes returns to creditors.
Conclusion
Even though general economic news is mixed, interest rates and the cost-of-living remain high and consumers are feeling the pinch. Creditors who handle credit card and auto loans should expect more customers to seek bankruptcy relief. Although we probably are not facing 2010 meltdown conditions, it seems certain that creditors increasingly will need to deal with more customers in financial distress and afford those customers the many protections that state and federal law require. That will add costs and compliance risks.
Commentary provided by Clifford J. White, Managing Director – Bankruptcy Compliance for AIS.
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In today's evolving financial landscape, two pivotal players are revolutionizing the mortgage industry: Managed Service Providers (MSPs) and Robotic Process Automation (RPA). AIS President, Tom Clark, explores the synergies between these two entities and how they're propelling the mortgage sector forward.
1. Navigating the Mortgage Landscape with MSPs
Mortgage operations, with their myriad complexities, necessitate a balanced approach, combining human expertise with technological advancement. MSPs have emerged as reliable partners, ensuring scalability and offering niche specialization.For growing mortgage entities, the challenge lies in accessing expertise without breaking the bank. MSPs offer a solution by handling intricate back-office operations, from underwriting to regulatory compliance, with the precision of a seasoned expert. These engagements are not just about cost-saving; they're about fostering efficiency and innovation.
2. RPA & MSPs: The Power Duo
The mortgage sector stands at the cusp of an RPA revolution. But, to harness RPA's full potential, preliminary groundwork is essential. This is where MSPs come into play.Often, firms possess processes that are either inadequately documented or not ripe for automation. MSPs provide the expertise to streamline these workflows. Once optimized, the potential for RPA integration is assessed. The synergy between MSPs and RPA is clear: MSPs lay the groundwork, and RPA takes efficiency to the next level.
3. Targeting the Right Mortgage Functions
Identifying tasks for MSP transition is the first step. Rule-driven, repetitive back-office tasks, like Loan Processing or Document Verification, are ripe for MSP handling. Once streamlined by MSPs, these operations can then be assessed for RPA deployment, usually within a 3 to 6-month window.
4. MSP-RPA One-Stop Shop: Benefits Galore
The advantages of partnering with a provider who offers and excels at both Managed Services and RPA are multifold:
- Immediate Efficiency: By first offloading the process to an expert, mortgage firms can instantly increase bandwidth and improve operations.
- Cost Savings: A process transitioned and managed by a high-quality, low-cost labor provider means reduced expenses.
- Seamless Transition to Automation: With deeper insights and understanding of the process, the transition to RPA becomes smoother and more effective.
- Flexibility & Scalability: As market demands fluctuate, this partnership ensures firms remain agile and responsive.
5. Choosing the Right Partner
As mortgage firms assess potential MSP-RPA providers, Tom Clark recommends:
- Ensuring depth in mortgage sector knowledge.
- Prioritizing providers with a proven track record of merging managed services with RPA.
- Compatibility checks between the firm's infrastructure and the provider's tech-stack.
- A focus on security and compliance.
- Identifying partners that are both scalable and adaptable.
The mortgage sector is poised for transformation. By strategically partnering with MSPs who can support labor and automation needs, mortgage firms can not only navigate the challenges of today but also set the foundation for the innovations of tomorrow.
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In today's challenging landscape, the mortgage industry is grappling with stringent regulations that demand an unparalleled focus on compliance and quality. The regulatory environment has never been stricter, emphasizing the critical role of both digital and human capabilities.
Mortgage firms are striving for enhanced operational efficiency and profitability amidst these challenges. The quest for solutions that offer adaptability without cumbersome administrative burdens becomes indispensable. Combining technology, domain expertise, and a talented workforce, AIS presents a compelling solution.
We empower mortgage companies to streamline operations, thereby reducing costs and bolstering loan servicing efficiency. Our approach ensures that mortgage firms can amplify their operational capacity without escalating their budgets.
Ensuring compliance and maintaining high quality in their operations is not merely a regulatory necessity—it's the foundation for business longevity and reputation. The costs of non-compliance, both in terms of potential penalties and reputational damage, can be significant.
Diving deeper, let's explore the specific aspects that mortgage servicers need to prioritize:
- Regulatory Compliance: Adherence to federal, state, and local regulations like RESPA, FDCPA, and TILA is paramount.
- Customer Service Quality: Efficient and effective handling of customer inquiries, complaints, and requests is a marker of a company's market reputation.
- Accurate Reporting: Ensuring timely and precise financial reporting to investors, tax authorities, and other stakeholders.
- Escrow Management: Handling funds related to property taxes, homeowner's insurance, and PMI for borrowers.
- Payment Processing: Timely and accurate processing of payments from borrowers is crucial.
- Default Management: For non-performing loans, the focus is on managing defaults, foreclosures, and loss mitigation efforts.
- Collateral Management: Protecting the underlying collateral, which often involves property insurance and maintenance.
- Document Management: Keeping a precise record of all loan documentation, correspondence, and transaction history.
- Cybersecurity and Data Protection: Safeguarding borrowers' sensitive information against potential cyber threats.
- Third-Party Management: Ensuring compliance and quality services from third-party vendors and contractors.
- Quality Control and Audits: Regular internal reviews and readiness for external examinations.
- Employee Training and Management: Keeping staff updated with training, especially in regulatory compliance and changes in the law.
- Business Continuity and Disaster Recovery: Preparing for unforeseen events to ensure continuous service.
- Transparency and Communication: Keeping borrowers informed about their loans and any significant changes or issues.
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For many banks, the idea of investing millions to explore large banking transformation initiatives might sound daunting and often unfeasible. As the market fills with vendors and consultants offering these complex solutions, it's essential to know that there's a different path available. One that's tailored for banks that may not have the time and resources to pour into such colossal projects. Welcome to the world of AIS: where we deliver fast, easy-to-implement banking solutions that are low-risk and high-reward.
Understanding the AIS Difference
In a landscape where bigger often seems better, AIS stands as a testament to the power of efficient, streamlined operations. With over two decades in the industry, we've learned that sometimes, it's not about reinventing the wheel, but optimizing it. Here’s what sets AIS apart:
- Quick Implementation: Our solutions are designed to be plug-and-play. That means shorter setup times and quicker results.
- Affordable Options: We offer top-tier services without the million-dollar price tags. AIS focuses on providing value, ensuring you get a better return on your investment faster.
- Customization: Recognizing that every bank is unique, our services are adaptable. We tailor our offerings based on what your institution needs, not the other way around.
AIS's Service Pillars
- Managed Services: Banks can offload their repetitive tasks to us. Our skilled teams ensure that your back-office operations run seamlessly. Learn more from our president, Tom Clark, who deep dives into the transformative power of managed services in banking.
- Process Automation: With the help of RPA and workflows, we automate repetitive processes, enabling banks to do more with less.
- Staff Augmentation: Whether it's for a specialized project or ongoing needs, AIS provides the talent you require to scale quickly.
Your Path to Efficiency
For banks evaluating a move towards managed services or process automation, our unique three-step process ensures a smooth transition:
- Onboarding & Processing: Understand, refine, and initiate. This step lays the groundwork for labor optimization.
- Technical Assessment: We analyze the need, scope, and technical requirements to identify automation opportunities.
- Implementation & Setup: Our team sets up the necessary infrastructure, ensuring a seamless integration into your existing operations.
In an age of overwhelming choices, AIS offers a refreshing alternative: effective, easy-to-implement solutions tailored for banks. Remember, it's not always about the biggest solutions but the right ones. With AIS, our clients now focus on what they do best, banking, while we take care of the rest.
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Outsourcing critical business processes to Managed Services Providers (MSPs) is not just about delegation. It’s about partnership, trust, and ensuring utmost quality. Especially when it comes to sectors as regulated as the mortgage industry, the stakes are high. AIS stands out in its commitment to compliance and quality. But how does AIS compare, and what should you look out for in a quality compliance partner?
Six Core Attributes of AIS's Partnership in the Mortgage Sector
- Growth-Centric Expertise: Every business aims to evolve and prosper, and the right collaboration can make this aspiration a reality. At AIS, our strength isn't just in quality and compliance, but in empowering businesses towards their goals. With our two-decade legacy, we don't just monitor standards; we help you navigate and anticipate market transitions.
- Global Insights with Local Precision: In a globalized world, nuances matter. While AIS bridges global best practices, our primary focus is ensuring these resonate locally. We're not just about expansive reach; we're about working alongside lenders and servicers to align with their specific needs and perspectives.
- Value-Centric Approach: Quality and affordability are paramount in today's landscape. AIS's commitment is to be a partner that offers unmatched service quality, ensuring you derive maximum value without straining your resources.
- A Legacy of Shared Successes: Reputation is built over time, through consistent delivery and shared victories. Our history isn't about our solo journey, but the stories of our partners' transformations and achievements. When you succeed, so do we.
- Tailored Solutions for Every Need: AIS recognizes that no two needs are identical. Our diverse services, from QC plans to intelligent sampling, are custom-tailored. We collaborate to understand your unique requirements and map our offerings accordingly.
- Empowering through Innovation: Technological advancements are reshaping industries. At AIS, we're not just about adopting these changes but about ensuring our partners harness them effectively. We collaborate to bring the latest digital solutions to your fingertips, ensuring you stay ahead in the competitive landscape.
A Commitment to Compliance and Quality
While it's paramount to align with an MSP that checks these foundational boxes, AIS believes in going the extra mile. From bankruptcy data monitoring to loan servicing to due diligence compliance audits, our diverse services are designed to cater to the nuanced needs of the mortgage industry.
Moreover, with ever-evolving regulations, mortgage firms need agile solutions that can be swiftly and safely implemented. Our solutions, backed by two decades of experience, offer this flexibility without the daunting administrative overhead. While many promise compliance and quality, AIS delivers it. By partnering with us, organizations are not just outsourcing tasks; they are aligning with a partner that's deeply invested in their success, and one that continues to set industry standards in quality and compliance.We work tirelessly to fulfill the quality requirements defined by the clients we support. Our software and servicing procedures include multiple QC points to detect and resolve any issues that may occur. We include a calibration process that promotes equitable process knowledge amongst all departments, leading to fewer breaks and minimized variance.
Our clients have access to customized, analytical tools for gathering additional insight into their customers and the work that’s being done on their portfolios. We leverage visual management systems to effectively track and communicate client-defined KPIs and CTQs on a daily basis.
So, as regulations tighten their grip and market challenges persist, remember that with AIS by your side, you’re more than ready to navigate the complexities of the mortgage world with confidence.
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As we have reported on bankruptcy filings for the past year, one of the most striking changes we have seen over the past year is a significant increase of about 17 percent in total filings so far this year.
As we dive deeper into those numbers, we see an even bigger increase in small business filings made under subchapter V, which fast-tracks the process. This year, small business subchapter Vs have risen by an incredible 44 percent.
Over the next several months, Congress will have to decide whether to revise current SBRA eligibility requirements. For small business and creditor advocates alike, this Congressional action will bear watching.
Background on Subchapter V
At the end of 2020, Congress passed a bi-partisan bill– you heard me right, I said bi-partisan, a word seldom heard here in Washington, D.C. It was called the Small Business Reorganization Act or SBRA. The purpose was to make it easier for small businesses to navigate the bankruptcy reorganization process successfully. The theory was that if debtors could re-negotiate their debts, the business could survive, jobs could be saved, and creditors would be more likely to be paid back.
The key features of the bill were:
- expedited procedures so cases may be completed in several months rather than over years;
- different repayment rules so owners of small businesses keep their stake in the company, as long as they devote a large share of their profits to repaying creditors; and
- a trustee for every case to help ensure the debtor reports accurately on its financial progress and negotiates a consensual repayment plan without the usual litigation.
Although subchapter V was initially designed for small businesses with debts no greater than $2.7 million, the debt limit was raised to $7.5 million as part of emergency COVID relief legislation. About one-third of the approximately 1500 subchapter V cases filed last year fell within the original debt limit and the temporary $7.5 million limit.
The Success of SBRA
Although the track record of SBRA only covers about two years, all measures point to successful results. According to official data from the Justice Department’s U. S. Trustee Program:
- About three out of every four small businesses that seek bankruptcy reorganization do so under subchapter V.
- The percentage of subchapter V debtors who obtain court confirmation of repayment plans is about double the percentage of other small businesses. And subchapter V cases move through the confirmation process about 40 percent faster.
- Not only that but nearly seven out of ten SBRA plans are consensual, meaning that creditors agreed without dissent.
Sunset of Higher Debt Limits and Other Changes
Between now and next June 21st, Congress must vote to extend the debt limit of $7.5 million or else it will revert to its original level. That will affect more than 500 small business debtors each year.
If Congress acts, there are several other tweaks to the law that many experts recommend as well, such as:
- Tightening the rules governing affiliates that file. The well-known cases of InfoWars podcaster Alex Jones and his media company have highlighted issues concerning strategically filing cases to evade the debt limits.
- There are other proposals under study as well, involving technical and administrative changes.
The American Bankruptcy Institute has a Task Force reviewing all these issues.
With the expiration of COVID relief to small businesses, many more individuals and companies may seek bankruptcy protection in the future. That will spotlight subchapter V and whether it should be limited or improved between now and next summer.
We will keep a close watch on this.
Commentary provided by Clifford J. White, Managing Director – Bankruptcy Compliance for AIS.
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In an era where staying ahead of the competition is paramount, CEOs and COOs in the financial sector constantly scout for methodologies that catalyze growth and streamline operations. With the pressure to realize tangible results swiftly, a structured approach to business transformation becomes imperative. Derived from a recent AIS executive brief that sheds light on strategic business transformations, this blog will walk you through a 12-week transformational journey tailored for financial service providers, aimed at reducing operational expenses and propelling revenue growth.
The Bankruptcy Situation: Navigating a 90-Day Turnaround
Economic downturns, global shifts, and unprecedented events can leave businesses in precarious financial situations. For financial service providers, these moments of turbulence can be both challenging and opportunistic. Leveraging the 90-day transformative agenda offers a focused roadmap to pivot, streamline, and capitalize, even when facing bankruptcy.
Your 12-Week Roadmap to Financial Revival and Growth
- WEEK 1-2: Dive deep into the company's core operations, laying out inefficiencies and untapped growth avenues. The mission? Craft a tactical plan to slash operating expenses and bolster revenue by a fifth.
- WEEK 3-4: It's action time. Implement astute cost-saving measures. This includes honing business processes, reworking vendor agreements, and possibly trimming the workforce. Yet, remember, any move should not dent the customer experience or inhibit revenue flow.
- WEEK 5-6: Spotlight on marketing. Roll out compelling campaigns designed to entice new clientele, utilizing precise customer data for messages that hit the mark. Keep a keen eye on indicators like CPA and conversion ratios.
- WEEK 7-8: Shift gears to customer retention. This phase is about ensuring clients stick around and spend more. Introduce loyalty schemes, uplift your customer service game, and continuously track pivotal metrics like churn and LTV.
- WEEK 9-10: Now, tap into the goldmine of existing customers. Explore avenues for cross-selling and upselling. Harness customer insights to pitch products and services they'd find irresistible. Monitor stats like ARPU and LTV to gauge success.
- WEEK 11-12: The home stretch. Time to pull out the report card. Assess your progress and goals of 20% expense reduction and revenue augmentation. Reflect on the achievements, recalibrate strategies if needed, and chalk out the next steps.
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Understanding and managing bankruptcy remains a pivotal task, especially for consumer banking and mortgage servicing sectors confronted with intricate regulatory frameworks. Drawing from the lessons of past financial downturns, the current digital and omnichannel environment offers a unique blend of challenges and growth prospects. For institutions aiming for continued success, it's essential to adeptly navigate bankruptcy management processes while staying informed of emerging trends and potential risks.
The core of bankruptcy management lies not just in responding to immediate crises but in proactively shaping strategies that ensure long-term resilience. Staying compliant, keeping customers satisfied, and limiting losses are not just checkboxes to tick but essential lifelines that determine the success and stability of banking institutions.
Best Practices & Strategies That Make a Difference
From ensuring strict adherence to ever-changing regulations to leveraging technology for innovation, managing bankruptcy departments effectively entails a multifaceted approach. Here’s a breakdown of the most effective strategies for managing bankruptcy departments:
- Compliance & Regulatory Adherence: It’s not just about meeting legal requirements. It's about understanding and embracing the spirit of these regulations to protect both institutions and consumers.
- Quality Control & Auditing: Regular audits and stringent quality checks ensure that processes remain consistent, accurate, and in line with the highest standards.
- Centralized Operations: Streamlining operations provides uniformity, reducing discrepancies and increasing efficiency across departments.
- Efficient Case Management System: A well-organized system facilitates quicker resolutions, aiding both institutions and their customers.
- Risk Management: Anticipating and addressing potential challenges ensures the stability and resilience of an institution.
- Effective Communication: Transparent and clear communication channels, both internally and externally, are vital for timely resolution and customer satisfaction.
- Proactive Loss Mitigation: Being a step ahead and addressing potential issues before they escalate is a hallmark of a proactive institution.
- Data Analytics & Reporting: In the digital age, leveraging data-driven insights aids informed decision-making, giving institutions an edge.
- Employee Training & Development: Empowering staff with continuous learning ensures they remain adept at handling evolving challenges.
- Third-party Vendor Management: Collaborative partnerships with vendors ensure both quality service and compliance with necessary protocols.
- Technological Innovation: Embracing modern technological tools and solutions enhances efficiency and ensures institutions remain competitive.
- Customer-centric Approach: In the end, it's all about the customers. Ensuring their satisfaction, trust, and loyalty should be at the heart of all practices.
Incorporating these best practices ensures that consumer banks and mortgage servicers not only manage but excel in their bankruptcy management efforts. However, it's essential to remember that while numbers provide an objective assessment, the true measure of success lies in an institution's ability to evolve, adapt, and serve its customers with integrity.
In essence, navigating the intricate world of bankruptcy management requires a balance of strategy, foresight, and an unwavering commitment to best practices. As we reflect on lessons from the past and gear up for challenges of the future, it's clear that with the right approach, banks and mortgage servicers can confidently tread the bankruptcy path, turning potential pitfalls into opportunities for growth and excellence.
Note: For those interested in delving deeper into optimizing default operation strategy or seeking real-world examples of transformations in the face of financial crises, feel free to reach out. Together, we can chart a course for success.
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The June bankruptcy filing numbers are in, and they show a continued upward spiral. Total bankruptcies numbered 37,922, or 17.42 percent above the number posted last June. For the first half of 2023, bankruptcies rose by 17.36 percent over the first six months of last year.
When will these steep increases end? We previously reported on the Justice Department’s U.S. Trustee Program projection of a 75 percent explosion between 2022 and 2024. If that estimate proves correct, bankruptcy filings will fast return to the pre-pandemic normal. But that may be a lot higher than many credit providers imagined just a few months ago.
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Chapter-by-Chapter Round-Up
Chapter 13 filings continued to set the pace for consumer filings, registering a 19 percent rise over June 2023. A combination of high interest rates, the need to protect a vast increase in home equity values, and the elevated cost of living all seem to be contributing to the expansion in chapter 13.
The number of chapter 7 filings rose by 15.4 percent last month compared to last year. Coping with higher prices and the loss of COVID relief that keep countless families afloat during the pandemic continues to force more borrowers into chapter 7 where a trustee liquidates non-exempt assets in return for a discharge of debts.
Maybe more portentous, chapter 11 filing marched upward in June by more than one-third at 35.7 percent. Small businesses in subchapter V almost DOUBLED by rising 98 percent last month. Businesses large and small face a precarious economic environment and, after years of low filings, now seem to require bankruptcy relief as much as consumers.
Important Updates on Federal Student Loans
One of the potential accelerants that may further fuel the fire of increased bankruptcy filings is student loan debt. Currently, more than 40 million Americans owe about $1.7 trillion in outstanding student loans. The federal government's repayment pause due to the pandemic is ending soon, thanks to a recent debt ceiling compromise mandating repayment resumption from October. This could strain many household budgets.
The Biden Administration's plan to forgive up to $20,000 in student loan debt, or about $430 billion in total, was halted by a Supreme Court ruling in Biden v. Nebraska. The court ruled that the President lacked the authority to cancel payments. Pursuing other statutory justifications to provide relief faces potential opposition and legal challenges.
With student debt relief options dwindling, bankruptcy may become a more popular option, despite the past difficulty in discharging student loans due to the "undue hardship" standard in the Bankruptcy Code. Over recent years, bankruptcy courts have increasingly discharged student loans, and the Department of Justice (DOJ) announced more debtor-friendly standards.
The end of the repayment moratorium and lack of loan cancellation likely means more borrowers exploring bankruptcy relief. Pressures on the DOJ to discharge loans are expected to increase, leading to more student loan bankruptcies.
Other Economic News
To the extent that broader national economic developments help drive bankruptcy filings – and they do, at least to some significant extent – the following headlines may be telling: "Get Ready for the Full-Employment Recession" (Wall Street Journal, June 3, 2023); "Struggling Companies That Got Debt Lifelines Are Failing Anyway" (Bloomberg, June 6, 2023); and "Student Loan Pause is Ending, With Consequences for Economy" (New York Times, June 21,2023).
Although Federal Reserve skipped a month in its long-standing hikes in interest rates, most economists expect the rate climb to resume later this summer. In any event, without a reduction in rates, consumers and businesses will continue to pay about twice as much in interest as they did about a year ago.
According to the Wall Street Journal piece referenced above, economic productivity ("output per hour worked") is "cratering." The June 18th online Creditor Corner publication contains interesting commentary about the current business default cycle. Bankruptcy lawyer Bradford Sandler of the Pachulski law firm concludes that business "restructuring professionals will continue to have a busy 2023 that most likely will continue into 2024."
Add to this recent commentary from banking regulators and outside experts suggesting that enhanced banking regulation for mid and even lower-tiered financial institutions is right around the corner. That may be good or bad for the overall economy, but it certainly means greater scrutiny and cost for bank operations.
Conclusion
June bankruptcy filing statistics, and other economic reports, tell "the same old story” we have heard before: bankruptcy filings are climbing at a rate not seen since the Great Recession more than a decade ago. Neither micro (e.g., student loan debt) nor macro (e.g., interest rates) economic data provide signs of a slowdown. Government projections show a return to the 2018-2019 filing rates over the next two years, doubling last year’s filing number. Now may be the time to believe the government experts.
Commentary provided by Clifford J. White, Managing Director – Bankruptcy Compliance for AIS.
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One of the potential accelerants that may further fuel the fire of increased bankruptcy filings is student loan debt. Currently, more than 40 million Americans owe about $1.7 trillion in outstanding student loans. Beginning with the COVID pandemic, the federal government paused repayments. That pause turned into a long hiatus which is about to end. As part of the recently enacted debt ceiling compromise, Congress mandated a resumption of federal student loan repayments. Specifically, interest will again be charged starting on September 1st and payments must recommence in October. Ideally, borrowers prepared for this long-anticipated change. But it is likely that a lot of younger adults, as well as their parents and even grandparents, may be shocked by the added cost in their family budgets and become stretched beyond their ability to pay on time.
In addition to the generous loan deferments provided during the pandemic and for months beyond, the Biden Administration planned to forgive households up to $20,000 in student loan debt. In total, about $430 billion owed to the federal government would be cancelled outright. But the Supreme Court just dashed that expectation in the Biden v. Nebraska, et al. case. On June 30th, by a 6-3 vote, the High Court ruled that the President lacked authority to cancel student loan payments. Writing for the majority, Chief Justice Roberts said that cancelling the debt would amount to rewriting the law "from the ground up” which the Executive Branch may not do.
Although the President is now pursuing alternative statutory justifications to provide student loan debt relief, any option is sure to face fierce opposition in Congress and strong challenge in the courts.
With two doors for student debt relief closed in recent weeks, will filing bankruptcy become a third and perhaps final option? In the past, it has been extremely hard – many would say unfair and nearly impossible – for student loan borrowers who are way over their heads in debt to find relief in the bankruptcy system. As previously explained on this web site, the Bankruptcy Code makes student loan debt non-dischargeable unless the debtor can show that repayment would create an "undue hardship.”
Both conservative and liberal jurists have decried the "draconian” gloss that many courts put on that standard. Some of the most outlandish cases involved a requirement that a debtor show utter "hopelessness” of medical recovery or condemnation of seeking a pastoral degree because churches simply do not pay sufficiently high salaries to permit repayment.
Over the last couple of years, bankruptcy courts have granted more and more student loan discharges than in the past. In addition, the U.S. Department of Justice (DOJ) announced more debtor-friendly standards for determining whether to oppose borrowers who assert an "undue hardship.” Neither DOJ nor the Department of Education has publicly revealed much information about the administration of these new standards, including how many debtors have applied and how much money debtors’ attorneys are charging to fill out the extra paperwork.
With the end of the student loan repayment moratorium and dashed hopes for loan cancellation, it is a sure bet that a large number of education borrowers will begin to explore bankruptcy relief. Most of those who would face difficulty in repaying student loans also carry other debts as well, such as credit cards, that could be wiped out in bankruptcy.
Pressures on DOJ to agree to discharges of federal student loans almost certainly will grow in the coming months. That will inevitably lead to more student loan debtor bankruptcies. The only question is how many more.
Commentary provided by Clifford J. White, Managing Director – Bankruptcy Compliance for AIS.
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Bankruptcy filings went up by 23.6 percent in May compared to the same period of time in 2022. The Department of Justice officially estimates that filings could double from pre-pandemic lows before the end of the calendar year 2025.
The rapid rise in bankruptcy filings occurred under all chapters – including chapter 7 liquidation, chapter 13 consumer repayment plans, and chapter 11 business and financial reorganizations. Chapter 11s exploded last month by 113 percent. Chapter 13s continued to experience the biggest increase in consumer filings by climbing more than a quarter (26 percent) over May 2022. Chapter 7s filings, which continued to drop until the middle of last year, went up last month by a robust 20.2 percent.
A Closer Look by Bankruptcy Chapter
With major problems in the retail sector and higher interest rates that limit options for businesses, chapter 11 cases more than doubled. Of course, some of that increase is due to related case filings, but even stripping that away, companies facing financial challenges are turning in significantly higher numbers to chapter 11.
Importantly, small businesses show continued signs of distress. For example, small businesses, which generally file under subchapter V, went up by two-thirds (67 percent) over last May.
It is somewhat remarkable that chapter 13 cases keep climbing even ahead of the traditionally more popular chapter 7 filings. These wage-earner repayment cases, filed most often to retain houses and cars, are particularly sensitive to interest rates because refinance alternatives to bankruptcy are not as viable any more. Interestingly, the stronger-than-expected jobs market may continue to make chapter 13 filings rise higher than chapter 7 because more wage-earners will have regular income to fund a repayment plan.
The largest number of cases continue to be filed under chapter 7, but the number of such filings was substantially depressed due to COVID-relief assistance which has now run out. With more than a 20 percent monthly increase over the previous year, chapter 7s continue their climb back to pre-pandemic levels.
Although there may be seasonal slow-downs in raw numbers of filings month-to-month, we should continue to focus on the difference from the same month in the previous year. By that measure, it is easy to predict that overall year-end filings will be substantially higher than in 2022. Even with an expected pause in interest rate hikes by the Federal Reserve, new credit is scarcer than it was a year ago and it is harder to repay existing debts taken out at high interest rates.
Department of Justice Projects Major Bankruptcy Filing Increase
Over the past many months, AIS commentaries have emphasized the likelihood of substantial increases in bankruptcy filings. This view has set us apart from many other commentators who expressed more tentative views. For those who think that AIS may have exaggerated its prognostications, read below. We have not been nearly as bold as the Department of Justice (DOJ)!
In its "FY 2024 Performance Budget Congressional Submission,” DOJ’s U.S. Trustee Program (USTP) provided bankruptcy filing projections to support President Biden’s appropriations request for next year.1
The USTP’ submission to Congress estimates that bankruptcy filings will experience a 75 percent increase between 2022 and 2024 and then continue higher until they reach pre-pandemic levels – which is double last year’s filing number.
The USTP makes the only official Executive Branch projection of bankruptcy filings each year. It does so as part of federal budgeting requirements, which require estimates of workload and revenues from case filings and quarterly chapter 11 fees. The USTP does not perform economic modeling, but traditionally bases its estimates on slope lines reflecting recent trends. The USTP concludes that "modeling filings on a gradual increase to [pre-pandemic] levels, filings could double in the next three years.” (DOJ/USTP FY 2024 Performance Budget, p. 18.)
If DOJ is right, then the rollercoaster will continue to steeply climb until it reaches about 800,000 filings.
The Broader Economic Context
As aggressive as the DOJ/USTP estimates appear to be, they are supported by most economic data. Here is a round-up of some of the more salient economic news during May:
- As widely reported, the escalating number of "Big Box” and other corporate bankruptcies continues as national retail businesses increasingly seek relief. Even beyond retailers, the financial press widely covered an S&P Global report calculating that, in the first four months of this year, the number of large bankruptcy cases reached its highest level since 2010.
- Also much ballyhooed in the financial press, the Federal Reserve reported that banks continue to tighten loan standards and expect to ratchet up requirements even more. Among other reasons, regional banks are tightening due to concerns about capital requirements which are unlikely to ease anytime soon.
- The Wall Street Journal (5/16/23) focused on another Fed Report showing that, in the first quarter of the year, debt balances that were 90 days or more delinquent jumped by 50 percent from the previous year. The WSJ further noted that things could get worse because payment of $1.7 trillion in outstanding student loan debt has been largely frozen, but may not remain frozen for much longer.
- On May 15th, The Hill, a Washington, D.C. insiders’ daily paper, published a deep dive analysis of Fed numbers and highlighted that first quarter consumer debt beat all records at about $17 trillion.
Conclusion
Lenders with national loan portfolios should expect a growing number of account delinquencies. The number of bankruptcy filings has been artificially low for more than two years and may now be doubling until filings reach sustainable pre-pandemic levels. This increase may strain lender resources because bankruptcy loan administration is often manual and more expensive. As the bankruptcy rollercoaster ride continues, we are on a steep climb, with perhaps a few drops along the way, before we reach an apex where we may stay for a while.
1 Fiscal Year (FY) budgeting reflects data from October 1 to September 30. For example, FY 2024 will start on October 1, 2023, and end on September 30, 2024. USTP estimates also exclude the six judicial districts is North Carolina and Alabama which are not part of the USTP.
Commentary provided by Clifford J. White, Managing Director – Bankruptcy Compliance for AIS.
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AIS President, Tom Clark, unpacks the transformative role of managed services in banking automation.
Q: Drawing from your extensive background as a bank CIO and InfoSec Executive, can you share your insights on working with managed service providers (MSPs) and their role in banking operations?
Clark: Over the past 25 years, I have collaborated with MSPs in various capacities within the financial services industry. These providers offer invaluable scalability and specialized expertise that may be difficult or costly to obtain.
For smaller and mid-sized companies, managed service providers bring scalability and specialized knowledge that may otherwise be unaffordable or impractical. For larger organizations, MSPs can efficiently handle non-core activities at a lower cost, allowing internal resources to focus on customer-facing differentiators.
I have witnessed firsthand the immense value MSPs contribute to supporting back-office functions, optimizing IT infrastructure, bolstering cybersecurity, and simplifying regulatory compliance. For instance, MSPs can provide flexible staffing and surge capabilities in tasks supporting residential mortgage fulfillment. Since volumes are highly dependent on interest rates, a sudden increase in volumes may exceed a provider's capacity to staff fulfillment positions. In such situations, an experienced MSP with robust process controls can create instant capacity to manage the surge.
Currently, as part of the AIS team, I work closely with our experts to develop and implement managed services and RPA solutions for banks, helping them enhance operational efficiency, reduce costs, and focus on their core objectives.
Q: How do AIS's "Managed Services" differ from traditional outsourcing?
Clark: AIS's managed services deviate from traditional outsourcing by fostering long-term partnerships centered around continuous improvement and alignment with client goals.
We act as an extension of our clients' teams, collaborating closely to achieve shared objectives and boost efficiency. This collaborative approach sets our managed services apart from conventional outsourcing, enabling us to deliver customized, strategic solutions that drive success for our clients.
Q: What advantages can banks gain from outsourcing processes to an MSP before implementing RPA solutions?
Clark: While there are many benefits of outsourcing to a managed service provider, efficiency and cost savings seem to be the most significant advantages. By outsourcing processes to a managed service provider initially, you can immediately cut costs in half. In our many years of experience, we have often found that client processes are not well documented or sufficiently mature for immediate automation. Starting with managed services enables our associates to become familiar with the process, document it and establish tighter process controls.
This allows us to work with our process engineers to optimize it and create a more efficient, better process from the start. As we assess the improved process, we can then determine if automation through RPA is a suitable fit. This entire process takes place with minimal intervention from the client. If the process isn't a good fit for automation, we can continue using our skilled personnel to maintain cost-effective operations, ensuring that your business remains competitive and efficient.
Q: Which back-office functions are the best candidates for transitioning to an MSP, and what is the typical timeline for enhancing these functions with RPA?
Clark: Ideal candidates for transitioning to an MSP include highly repetitive, rule-based, manual back-office functions prone to human error. Financial Spreading, Positive Pay, and Deposit Document Indexing are just a few examples.
Depending upon client environment testing and customizations, bot deployment could take between 3 to 6 months.
Q: What advice would you give to a bank evaluating different providers?
Clark: When selecting a provider, banks should:
- Assess the provider's domain expertise and industry experience.
- Examine the provider's track record offering a blend of managed services with RPA implementation and process optimization.
- Evaluate the provider's technology stack and its compatibility with the bank's existing infrastructure.
- Ensure the provider prioritizes security and compliance to mitigate potential risks.
- Seek providers that offer flexible engagement models and can scale with the bank's evolving needs.
- Consider the provider's ability to collaborate and communicate effectively with the bank's internal teams.
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Total bankruptcy filings in April rose by 9.3 percent compared to the same month last year. This is the ninth consecutive month of overall filing increases. The rate of increase was less than last month’s increase, but March often reflects the response to the shock of holiday bills. Total filings for the first four months of 2023 are up by 15.7 percent over last year. This data analysis reinforces that the American bankruptcy system had better prepare for a sustained period of significant filing increases.
Breakdown of Data by Major Chapter
The number of monthly chapter 7 liquidation cases rose by 4.9 percent over April 2022. Although this increase is down from the 12.1 percent increase last month, it reflects a significant and continuing rebound from the historic COVID-era decreases.
Chapter 13 cases filed in April rose by another 15.1 percent compared to last year, which is remarkable given the extraordinary growth we already have seen. Moreover, the most recent talk in trustee and consumer attorney circles is that previous home value increases have provided debtors with substantial home equity, even in spite of the recent cooling of home sales. Add to that mortgage interest rates that are unaffordable and less available, and chapter 13 makes even more economic sense for homeowners.
Chapter 11s went up by a very strong 58.2 percent over last April, albeit led by the multiple filings made by Bed, Bath & Beyond. The stress on corporations is increasingly apparent. This is even more so with Subchapter V small business filings, which rose by a stratospheric 85.9 percent compared to last year. The strain of high interest rates and restrictive lending may be showing most conspicuously in the small business numbers.
Round-Up of Some Significant Economic Data Points
Beyond the now obvious reasons for the rise in consumer filings (namely, the government exploded all past records of government cash and other assistance during COVID), other economic reports in April continue to flash warning signs about what is on the horizon. These signs are ominous regardless of whether the national economy falls into an officially declared recession. Here are a few signs worth noting:
- The banking sector remains in flux and there are indications of a retrenchment in lending, especially by smaller regional and community banks. Moody’s even "downgraded its outlook for the entire U.S. banking sector to negative from stable . . . .” (Source: Michael Eisenband, FTI, Consulting, Inc., in Law 360, 4/18/23.)
- Even with easing inflation – which is still more than double the Federal Reserve’s two percent target rate – average real weekly earnings for non-supervisory employees have dropped by 3.6 percent over the past two years. (Source: WSJ, 4/7/23.)
- The Fed just hiked interest rates by another quarter point, so the target rate may reach 5.25 percent. That will adversely affect all borrowers, both corporations and consumers alike. Even if the Fed can avoid future rate increases, the economic effect of past hikes may be long-lived and rates not reduced until inflation is better tamed.
- Corporate defaults may be about to rise significantly. According to Bloomberg, "[r]ratings firms are on track to cut the most US corporate bonds to junk since the early part of the pandemic, further boosting the funding costs for some companies just as economic growth in slowing.” (Source: Olivia Raimonde, Bloomberg, 4/9/23.) Add to that a recent piece by Emeritus Professor Edward I. Altman of the NYU Stern School of Business in which he concluded that the corporate credit picture might be about to worsen, with "risky debt default rates rising to perhaps 10%, or more, over one or two years.” (Source: Creditor Corner, 4/12/23).
Macroeconomic and corporate bond trends do not always follow a straight line with bankruptcy filings, but a drill down on consumer credit news also yields major red flags. Although the quality of credit portfolios varies markedly among lenders, evidence of previously reported expansions of consumer credit continues to lead to more negative reports on consumer debtor defaults.
A Businessweek headline sums up some of the recent news: "The Repo Man Returns as More Americans Fall Behind on Car Payments.” Fitch ratings show more than a doubling of subprime auto borrowers who were 60 days or more delinquent in making payments compared to the May 2021 pandemic low. That is higher than the delinquency rate at the height of the Great Recession. (Source: Clare Ballentine, Businessweek, 4/19/23.)
Added to all this are anecdotal reports that bankruptcy practices are receiving more regulatory scrutiny. That is exactly what happened when filings rose during the Great Recession. One difference is that there is another cop on the block this time. The CFPB now has supervisory powers over banking institutions that it has no hesitation in using. CFPB views its scope as encompassing violations of both bankruptcy and consumer protection laws.
Another cautionary note: debtor counsel can also expect to be more aggressive. A recent unpublished decision illustrates the point. In Orlansky v. Quicken Loans, BAP No. NV-22-1181 (filed April 14, 2023), a debtor challenged the monthly mortgage statement sent to debtors for incorrectly placing its notice of pre-petition fees. The Bankruptcy Appellate Panel reversed a bankruptcy court decision and found a violation of the automatic stay. In that case, the court expects damages to be "relatively minimal.” (Kudos to Bill Rochelle of the American Bankruptcy Institute for flagging the case in his daily report posting on the ABI website.)
Conclusion
Here’s a wrap-up for April: Bankruptcy filings are climbing higher than most analysts expected. General economic news is ominous, including for consumer lending. As expected, regulators are perched and ready to pounce. So, auto and mortgage lenders beware.
Commentary provided by Clifford J. White, Managing Director – Bankruptcy Compliance for AIS.
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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.
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* 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.
Conclusion
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.
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With the failure of Silicon Valley Bank (SVB) and Signature Bank, many in the bankruptcy community ask what – if any – impact there will be on bankruptcy filings and the bankruptcy system. Following is a snapshot of some of the issues and impacts being discussed:
If bank regulations tighten, will filings go up or down?
That may depend on the extent of any regulatory crackdown. Right now, with the federal government back-stopping any losses to depositors, it would appear that the crisis is contained. But if the regulatory reaction leads banks to reduce lending, businesses could be on a rough ride, and chapter 11 filings may rise. In turn, that could lead to job losses and other adverse economic effects that may also push some consumer debtors over the edge into bankruptcy.
According to a story in the Wall Street Journal, "Main Street businesses and American families are likely to find it harder to get a loan because of turmoil in the banking industry, denting economic growth and raising the risk of recession.” The paper goes on to cite data showing that smaller and medium-sized banks, which are facing the greatest scrutiny right now, are more likely to retrench. Banks smaller than the top 25 banks make about 38 percent of all outstanding loans and a whopping 67 percent of commercial real estate loans. As smaller and medium-sized banks are most vulnerable to a regulatory crackdown, the current bank climate may lead to accelerated bankruptcy filings over time.
What happens to bankruptcy filing rates if the Federal Reserve stops raising interest rates?
If the Fed responds to the current banking problems with a pause or reversal of interest rate hikes, then the rate of increase in the number of bankruptcy filings may move lower. If the federal government also permanently expands the $250,000 deposit insurance limits and takes steps to encourage banks to make business and consumer loans, then the rapid pace of bankruptcy filings may further slow in the near-term.
It is still hard to see how the overall number of filings could dramatically reverse the current upward trend. In fact, it seems that only a reversal in the Fed’s interest rate policy can prevent an even bigger increase in bankruptcy filings than we have been seeing. I guess we should wait for a few more Fed meetings and commentaries by economic experts before changing expectations for many more bankruptcies in 2023.
Are bankruptcy estate funds protected?
Short answer – the law unambiguously requires it. The longer answer – it’s more complicated than that.
Payments to creditors depend upon the safety of cash deposits and investments from bankruptcy estates. Each year, up to $10 billion are disbursed by chapter 7 and 13 trustees. Chapter 11 estates disburse additional huge sums in conducting business while in bankruptcy and paying creditors under confirmed reorganization plans. That is why Congress enacted section 345 of the Bankruptcy Code, which provides that bankruptcy estates must make deposits and investments that "will yield the maximum reasonable net return on such money, taking into account the safety of such deposit or investment.” The law requires that financial institutions holding estate funds protect all amounts that exceed federal insurance limits by posting collateral or bonds.
The Justice Department’s United States Trustee Program (USTP) polices compliance with section 345 by limiting bankruptcy estates to authorized depositories that agree to USTP monitoring for compliance. This works very well in cases controlled by USTP-appointed private trustees. However, things get a bit dicier in chapter 11 cases in which management stays in control of the debtor company. Although the USTP is strict in its application of section 345, the law allows courts to make exceptions. This came to a head in the BlockFi crypto-currency case, which had not protected its money as directed by the USTP. Fortunately, no money was lost in BlockFi or other cases.The current banking problems should serve as a significant caution to businesses, and their lawyers, that failure to adhere to section 345 protections may carry huge consequences.
Why haven’t Silicon Valley Bank and Signature Bank filed for bankruptcy?
Banks are not eligible to file for bankruptcy. When banks become insolvent, they are liquidated through bridge banks and overseen by a banking regulator to protect depositors instead of creditors. Banks are often owned by holding companies, however, that do file for bankruptcy. The holding company for Silicon Valley Bank recently filed a chapter 11 bankruptcy petition.
It will be interesting to see if an independent bankruptcy examiner will be appointed to investigate SVB – apart from other reported criminal and civil investigations. The purpose of the bankruptcy investigation would be to issue a public report into the causes of the collapse and possible stakeholder causes of action. During the Great Recession, Washington Mutual (the largest bank collapse in American history) and other lenders were subject to such independent bankruptcy examinations. Given the deference paid by bankruptcy judges to management and law firms representing large chapter 11 debtors, however, I would not hold my breath.
Commentary provided by Clifford J. White, Managing Director – Bankruptcy Compliance for AIS.
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February 2023 bankruptcy filings rose by a hefty 18.2 percent compared to the same month last year. This uptick matched the January percentage increase. After falling during the first part of 2022, filings began to climb, slowing beginning last summer. The rapid acceleration experienced over the previous two months is the greatest since the Great Recession in 2009. If this trend continues, about 70,000 more cases will be filed this year than in 2022.
Filings Rose Across the Board
With total February filings of 32,032, all major chapters of the Bankruptcy Code saw a significant rise compared to last February. As has been the case for the past year, chapter 13s led the way with a huge increase of 29.3 percent. Chapter 7s, which have consistently lagged behind other chapters since the pandemic, are also in an upward tilt mode with a strong rise of 10 percent. Chapter 11 cases skyrocketed by 77.2 percent last month as they stay on a steep upward path. Small business subchapter V cases registered a solid gain of 23.9 percent.
Of course, there may be many blips ahead. But the strong filing rates in February continue a strong upward trajectory that may not stop very soon.
Possible Reasons for the Rapid IncreasesThe current rocketing numbers may be fueled by the same economic conditions described in previous AIS reports, except now the fuller effects of adverse economic conditions are being felt in fuller force. The economic picture is mixed, but the positive data, such as lower unemployment rates, have not offset the hardships caused by the negative economic factors.
Historically, bankruptcy filings are influenced by macroeconomic conditions and more specific factors so that, during some periods, increased numbers of consumer and business debtors have needed bankruptcy relief during prosperous times. That makes sense because good times usually involve relaxed credit and more opportunities to make risky bets or take on too much debt.
In February, the Federal Reserve published data showing that revolving debt reached nearly $1.2 trillion in 2022, surpassing pre-pandemic debt levels. That is often a sure sign of economic travails to come for those in shakier economic circumstances.
A prominent chapter 13 trustee recently suggested that wage-earner repayment plans may continue to rise because of high home mortgage interest rates. In the past, some consumers who owned homes would walk away from their mortgages with confidence that they could buy another home in a couple of years when they could better afford it. Today, overburdened homeowners know they are likely to confront higher mortgage interests rates in the future and choose instead to make chapter 13 plan payments and keep the current family home.
The evidence continues to mount that consumers have lost their cash cushion from pandemic-era government assistance. The Wall Street Journal recently reported an estimate by Goldman Sachs that, by the end of the year, consumers will have spent down 65 percent of the cash they had built up during the pandemic. Other cited data showed that the problem is even more acute for lower-income Americans. As we know, those are the debtors who may be the first to be pushed over the bankruptcy cliff.
The prime rate now stands at 7.75 percent, which reflects an almost 140 percent rise from a year ago. That affects consumers and businesses across the board.
Perhaps the best summation of the national economic news was provided by the Director of Congressional Budget Office (CBO), who said:
"For 2023, we project stagnant output, rising unemployment, gradually slowing inflation, and interest rates that remain at or above their current levels at the beginning of the year – before the economy subsequently rebounds.”
The impact on consumers is detailed in a report by Ares, an alternative credit manager and lender (source: the Creditor Rights Coalition’s weekly Creditor Corner), which summarized the situation this way: "[S]avings are depleted and households increasingly turn to debt to finance their continue spending . . . . [W]e are seeing a rapid transition from increasing savings to increasing indebtedness at the microeconomic, household level.” Ares goes on to describe increased withdrawals in pension funds and "massive losses with residential mortgages” suffered by banks.
CBO also paints a gloomy picture on government debt levels, but we will leave the implications to economists, rather than bankruptcy watchers.
Conclusion
For now, all we can do is monitor next month’s bankruptcy filing numbers and see how lenders begin to cope with bankruptcy filing increases not seen in recent memory.
Commentary provided by Clifford J. White, Managing Director – Bankruptcy Compliance for AIS.
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For many years, consumer bankruptcy has been beset by controversies and misconceptions. Some stakeholder groups continue to wage war against the Bankruptcy Abuse Prevention and Consumer Protect Act of 2005 (BAPCPA) which changed consumer practice in fundamental ways. Perhaps the debate could be a bit more constructive and less vitriolic if there was a common understanding of basic facts. This is the first in an occasional series of short analyses AIS will post on some of the controversies that have received the most attention. We will start with the Means Test, which is probably the hottest of the hot-button issues in the consumer bankruptcy world.
Means Test by the Numbers
The cornerstone of the 2005 consumer bankruptcy amendments was the Means Test, that was designed to limit bankruptcy relief to debtors with modest or no disposable income after deducting for allowable expenses set by the Internal Revenue Service. The Means Test applies to individual chapter 7 debtors with primarily consumer debt. It also applies to chapter 13 wage-earners in calculating the amount of income that must be devoted to a repayment plan. The major criticism of the Means Test is that the numerical expense limitations would disqualify many needy debtors. Guess, what? It didn’t happen. So now the debate has shifted to whether the extra financial information required under the Means Test and other provisions of the law have added unnecessary costs to filing.
Let’s look at the facts (using round numbers that hold true year after year): only about 10 percent of all chapter 7 (liquidation) debtors earn more than their state’s median income. The rest are exempt from the Means Test. Of those debtors with above-median income, less than 10 percent have excess disposal income that exceeds the statutory maximum of about $250 per month. That shows that the overwhelming majority of debtors who seek to wipe out their debts are truly in financial crisis and not simply taking advantage of their creditors. Not only that, but the U.S. Trustee Program (USTP) has found that more than 60 percent of all chapter 7 cases with excess income are not abusive because of recent job loss or ongoing medical expenses for which the Means Test formula cannot take into account. Congress gave the USTP the discretion not to file motions to dismiss in cases of debtors with exceptional circumstances, and it prudently exercises that discretion. The bottom line is that less than one percent of chapter 7 filers are dismissed because they "fail” the Means Test.
Not only do these facts speak for themselves, but everybody who practiced or observed the consumer bankruptcy system before BAPCPA knows that there was a gross disparity in judicial decisions on what constituted "substantial abuse” justifying dismissal. The old (and universally known) joke was that a lawyer knew her client’s case was in trouble if the debtor drove a better car than the judge. Inherent in the notion of justice is equality – the fundamental principle that like cases should be decided alike regardless of the court where the cases were filed.
Debtor Attorney Fees
With the argument that the Mean Test disqualifies needy debtors laid to rest, opponents of BAPCPA say, with some justification, that the costs of filing bankruptcy are too high. This is a legitimate point. By far the most significant cost increase has been in debtor attorney fees. Over the nearly 20 years since the enactment of the 2005 amendments, debtor attorney fees have skyrocketed by a multiple of the less than $1000 that used to be charged for a simple chapter 7 case. It is true that the Means Test paperwork is substantial, but about 90 percent of chapter 7 debtors do not even have to fill out most of the paperwork because their income is below their state’s median for a family of their size. Yet, even the simplest cases cost significantly more. Even though the 2005 law also imposed some additional non-Means Test documentation (e.g., proof of income), how can that alone justify legal fee increases that dwarf inflation? The problem is even more acute when considering that the debtors who pay the fees are in dire financial straits.
It is absolutely true that debtor lawyers have been in rough economic times. With filings so relatively low, it is hard for firms to realize economies of scale without sacrificing the quality of work.1 By law, unpaid chapter 7 legal fees are discharged in the bankruptcy case. So chapter 7 lawyers have to be paid upfront before the case is filed. (Chapter 13 debtor attorney fees can be paid over the life of the repayment plan.) Some attorneys have turned to "bifurcated” fee arrangements whereby the scope of the pre-petition engagement is limited, and so are the upfront fees. Others argue for changing the law so that chapter 7 legal fees are not discharged. These solutions all have significant drawbacks worthy of a separate analysis.
Perhaps the best solution may lie in technology improvements. For example, new software might allow debtors to complete more paperwork themselves if they have few or no assets subject to liquidation under bankruptcy law. A few pioneers in this area, such as Law Professor Lois Lopica at the University of Denver, have made some progress. But talk of innovative solutions has largely been drowned out by a cacophony of political rhetoric and self-interested arguments designed to justify higher legal fees. There is also some serious academic and legislative debate on rethinking the bankruptcy system. But, for any of the flaws of some of those ideas, at least they represent a non-self-interested effort at improving access to bankruptcy relief.
All in all, blaming the Means Test for burgeoning attorney fees may be a bit exaggerated. The solution to the legal fee dilemma may reside outside of any changes to the Means Test.
Conclusion
As with many political debates, the controversy over bankruptcy policy and practice is fraught with misconceptions. But the debates also raise many legitimate issues worthy of consideration. That debate will best flourish, and contribute to better public policy, only when we work from the same set of facts.
1 The significant increases in the number of consumer bankruptcy filings in recent months may provide some compensation relief to debtors’ attorneys.
Commentary provided by Clifford J. White, Managing Director – Bankruptcy Compliance for AIS.
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The upward drift of bankruptcy filings seen in the last half of 2022 was turbo-charged in the first month of this year. After increasing by five percent during the last two quarters of 2022, bankruptcy filings increased by 18.9 percent last month compared to the previous January, for a total of 31,285 new filings. This was the most significant increase since March 2010. As our December report and Webinar suggested two weeks ago, big increases in filing numbers may be in store for this year. 1
Drilling down just a bit chapter by chapter may provide more clues on what to expect.2
Chapter 13
Chapter 13 filings maintained their torrid pace and climbed by 33.5 percent over last January. During the fourth quarter of last year, the chapter 13 filing increase slightly cooled to a still red-hot 27 percent. This means the upward trajectory is getting even steeper. Chapter 13 filings continue to far outpace chapter 7s.
The key to filing rates this year may lie with chapter 7s filings. They stopped their steep decline last summer. Insofar as chapter 7s constitute a majority of all bankruptcy filings, any upward turn in total filings will also require chapter 7s to increase. That is precisely what happened last month.
Chapter 11s were on a roller-coaster last year but showed signs of moving upward. As noted in previous AIS analyses of filings, chapter 11s can be erratic because the total number of cases is a small proportion of all bankruptcies and changes in a single industry can make a difference. In January, chapter 11 filings rose by an extraordinary 65.2 percent. With big retailers speculated to file soon, chapter 11 filings may be higher than normal again next month because retail companies are often organized in a way that causes multiple affiliates to file as separate cases.
Subchapter V small business cases robustly rose by 33.4 percent compared to last January. Subchapter Vs were fairly steady last year, so this major increase may be a blip on the screen or, maybe more likely, augur a more sustained increase. But the numbers are small (130 subchapter Vs last month), so monthly variations are to be expected.
Consumers do not appear to be faring all that well these days. They are cash-strapped, facing higher prices, and paying more to borrow money. The Wall Street Journal posted a graph on January 30th that showed how personal savings rates peaked when COVID cash assistance was disbursed but plummeted as the government money ran out. The personal savings rate is dwindling fast. Personal savings out topped out at 33.8 percent of income in April 2020 and now stands a tad above 3 percent.
With the exception of the recent jobs report, it is not easy to find rosy economic news. Inflation is moderating but remains high. Much of the rest of the economic news is negative, and most economists expect it to stay that way for a while longer. Most data suggest consumer distress, as shown by higher amounts of credit card debt, growing delinquencies (e.g., a large auto lender reported that the number of loans more than 60 days overdue almost doubled in the fourth quarter), and continued upward ticks in interest rates.
On the business front, the Creditor Rights Coalition cited an expert prediction that retail bankruptcies will increase because inflation is hurting consumers, retailers are overextended on inventory, and capital markets have tightened.
Conclusion
Bankruptcies are way up to the start of the year. Although we may see some blips, there are a few reasons to expect a return to historically low filing numbers. It has been more than a decade since overall bankruptcy filings increased so briskly. AIS will continue to monitor and report filing rate trends and the impacts that they may have on consumers, creditors, and the bankruptcy system.
Commentary provided by Clifford J. White, Managing Director – Bankruptcy Compliance for AIS.
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Calendar Year 2022 was filled with lots of economic and other surprises. Unfortunately, few of them were good. So perhaps it should come as a relief that the December bankruptcy filing data contained No Surprises.
Chapter-by-Chapter Trends
We will cover these trends and more during our 2023 Bankruptcy Outlook Webinar on January 25th.
Annual Filings
- Overall filings will increase by 10 percent this year. With economic conditions at best middling and at worst foreboding a significant recession – not to mention with little new economic assistance in the political cards and possibly more student loan borrowers seeking bankruptcy relief (see previous blogs for a discussion of changes in the Department of Justice legal position on dischargeability of student loan debt) -- bankruptcy filings are primed to rise by a tad more than double the rate of the past six months. However, that would still be about 45 percent less than the "normal” pre-pandemic level.
- The number of filings under each chapter will rise. At the risk of climbing out even farther on the proverbial prognostication limb, here's to predicting that chapter 7 filings will reverse their downward trend and rise by 5 percent. Distressed borrowers can hold out for just so long. Chapter 13s will rise by the same 27 percent that they rose in the past quarter of CY 2022, but behind the torrid 46 percent pace of the quarter before that.
- Chapter 11s will rise the most among all chapters, perhaps by 25 to 50 percent over last year. Suppose interest rates are as key to business filing patterns as the Wall Street bankruptcy experts have told us for the past decade (we can name names). In that case, the DOUBLING of the prime interest rate over the past year, along with the Fed Chair’s promise for more increases to begin the new year, suggests a lot more filings throughout 2023.
- Small business subchapter V cases will increase by the same 14 percent as they did in 2022. This is because the upward trajectory in subchapter Vs was relatively steady last year, and they are not subject to same kind of industry-specific collapse (think cryptocurrency) that brings a wave of new cases crashing against the business reorganization shores.
Commentary provided by Clifford J. White, Managing Director – Bankruptcy Compliance for AIS.
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Bankruptcy filings dropped nearly 7 percent over the last 12 months, but that gap has closed significantly in the second half of 2022. November marked the fourth consecutive month in which overall filings were above the same month in the previous year.
- Few political prognosticators predicted the outcome of the November 8th election. Exit polls showed Republicans winning on most issues of concern to voters, but Democrats kept their Senate majority and barely lost their House of Representatives majority. This probably means that there will be little meaningful legislative activity, including on bankruptcy, until after the next Presidential election. Some wags might be justified in saying that the beleaguered electorate likes gridlock and many businesses might benefit from that, too.
- A pause in Congressional law-making does not necessarily mean that all will be quiet on the regulatory front. One may recall recent history when the executive branch grew restless in the face of legislative stalemate and doubled down on their exercise of regulatory authorities. In this regard, it will be interesting to see if the Consumer Financial Protection Board (CFPB) picks it enforcement battles more carefully in light of its recent major loss in the United States Court of Appeals for the Fifth Circuit. In Community Financial Services Association of America v. CFPB, the appeals court struck down a CFPB rule-making authority on grounds that the agency’s funding mechanism, which does not require Congressional appropriations, is unconstitutional. The U.S. Department of Justice is seeking reversal of the decision in the Supreme Court.
- The Justice Department (DOJ) also took a major step to relieve student loan borrowers of their repayment obligations if they file for bankruptcy. Currently, debtors with high student loan balances often do not file because that debt is generally not dischargeable in bankruptcy. If more debt-ladened students file, then not only will student loan debts be discharged, but so will credit card and other debts.
To effect the more generous loan forgiveness policy, DOJ established more sympathetic criteria for the government to use in determining whether the statutory "undue hardship” standard for discharge of student loan debts is satisfied. If the government now more readily agrees with the debtor that repayment would impose an "undue hardship,” then it is far more likely that the bankruptcy court will grant the discharge. This should make bankruptcy a more attractive option for students, as well as their parents and grandparents who took out the loans on the students’ behalf, who cannot keep up with their bills.
For more information, please register for our webinar on January 25th.
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Broader Economic Trends
Questions Unanswered
- Few political prognosticators predicted the outcome of the November 8th election. Exit polls showed Republicans winning on most issues of concern to voters, but Democrats kept their Senate majority and barely lost their House of Representatives majority. This probably means that there will be little meaningful legislative activity, including on bankruptcy, until after the next Presidential election. Some wags might be justified in saying that the beleaguered electorate likes gridlock and many businesses might benefit from that, too.
- A pause in Congressional law-making does not necessarily mean that all will be quiet on the regulatory front. One may recall recent history when the executive branch grew restless in the face of legislative stalemate and doubled down on their exercise of regulatory authorities. In this regard, it will be interesting to see if the Consumer Financial Protection Board (CFPB) picks it enforcement battles more carefully in light of its recent major loss in the United States Court of Appeals for the Fifth Circuit. In Community Financial Services Association of America v. CFPB, the appeals court struck down a CFPB rule-making authority on grounds that the agency’s funding mechanism, which does not require Congressional appropriations, is unconstitutional. The U.S. Department of Justice is seeking reversal of the decision in the Supreme Court.
- The Justice Department (DOJ) also took a major step to relieve student loan borrowers of their repayment obligations if they file for bankruptcy. Currently, debtors with high student loan balances often do not file because that debt is generally not dischargeable in bankruptcy. If more debt-ladened students file, then not only will student loan debts be discharged, but so will credit card and other debts.
To effect the more generous loan forgiveness policy, DOJ established more sympathetic criteria for the government to use in determining whether the statutory "undue hardship” standard for discharge of student loan debts is satisfied. If the government now more readily agrees with the debtor that repayment would impose an "undue hardship,” then it is far more likely that the bankruptcy court will grant the discharge. This should make bankruptcy a more attractive option for students, as well as their parents and grandparents who took out the loans on the students’ behalf, who cannot keep up with their bills.
Conclusion
Commentary provided by Clifford J. White, Managing Director – Bankruptcy Compliance for AIS.
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Chapter Breakout
Questions Unanswered
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How far and how fast will filings increase? There has been a lot of depressing economic news lately, from high inflation, skyrocketing interest rates, and unclear national economic growth. Are consumers and businesses better able to handle financial setbacks today than they were before the pandemic? If they are not, then what will prevent filings from reaching pre-pandemic levels which were almost double today’s bankruptcy filing levels?
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Will the number of chapter 13 filings surpass chapter 7 filings? Chapter 13s now constitute more than 44 percent of total filings. Is this a permanent adjustment in favor of chapter 13s or will chapter 7’s rocket upward if unemployment rates increase during the expected recession and make chapter 13 wage-earner plans an impossibility? There is also a lingering question of whether some consumer bankruptcy lawyers inappropriately place their clients in chapter 13 plans that have little likelihood of success. It is posited that some lawyers do that for the larger fees they can charge in chapter 13 and that some judges are willing to confirm plans that delay repossession or foreclosure without meaningful creditor distributions. The answer to these questions may have to await plan confirmation and completion data many months down the road.
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Did creditors learn their lessons from the last recession and ensure they still have compliant bankruptcy processing systems? If the economy sours and regulatory scrutiny grows, which creditors will be tagged first? It is no secret that the deterrent effect of enforcement actions is greatest in the initial earlier days of a government initiative. So the amount of "noise” attached to complaints and settlements involving financial institutions or lenders who are investigated first will be the loudest. If major mortgage servicers improved their operations in the wake of previous settlements and changes to industry standards, are those enhanced practices still in place? Did auto lenders make similar improvements even though they were not targeted nearly as much as mortgage servicers in past years?
Conclusion
Commentary provided by Clifford J. White, Managing Director – Bankruptcy Compliance for AIS.
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AIS recently informed its clients about a new U.S. Department of Justice (DOJ) policy that was more favorable to the imposition of independent monitors to oversee corporate compliance. The previous Administration disfavored such appointments. In September, Deputy Attorney General (DAG) Lisa Monaca strengthened the new DOJ policy on monitoring and holding individual company employees and executives accountable for corporate non-compliance. The policy pertains directly to criminal prosecution decisions in corporate cases, but civil enforcement components can be expected to apply the principles to a wide range of regulatory and other non-criminal actions as well, perhaps including bankruptcy violations.
New DOJ PoliciesIn a speech at New York University Law School that was followed by a detailed 15-page directive to DOJ officials, the Deputy Attorney General set forth detailed revisions to "Corporate Criminal Enforcement Policies” that will bind prosecutors in making charging decisions and entering into non-prosecution settlements (the "Monaco Memorandum). Much of the policy quite conceivably could apply to civil actions taken by DOJ components as well, including in bankruptcy matters.
Among the many significant features of the new DOJ policy are the following:
- Monitorships are no longer disfavored. DOJ has historically deferred prosecutions of some corporations that agree to alternative relief, including the appointment of corporate monitors who will ensure that the company meets its obligations under the DOJ agreement. This often involves reviewing the company’s development and compliance with extensive internal procedures to avoid the recurrence of misconduct. Many bankruptcy creditors may recall the use of monitors in the $25 billion National Mortgage Settlement (NMS) entered by several banks and government agencies. In addition to being a party the NMS, DOJ’s United States Trustee Program (USTP) also imposed corporate monitors in settling other bankruptcy enforcement actions. Those agreements generally involved both payment of hefty sums to debtors who were harmed by creditor conduct and also major changes to internal bankruptcy compliance procedures. The corporate monitors were selected to oversee and evaluate adherence to the court-ordered settlements and the banks’ new compliance regime.
- Corporate officials responsible for legal violations will be investigated and held accountable. According to DAG Monaco, "[t]he Department’s first priority in corporate criminal matters is to hold accountable individuals who commit and profit from corporate crime.” To that end, DOJ will extend "cooperation credit” if a company turns over non-privileged documents revealing individual wrongdoing. Importantly, company compensation policies also will be scrutinized to ensure that employee compensation plans provide "affirmative incentives for compliance-promoting behavior” and penalizes non-compliance, including through claw-backs of bonuses awarded to executives who are responsible for the company’s violations of law. Compensation packages that are geared toward revenues without balancing the necessity of compliance would clearly put the company at risk under the new policy.
- Corporations that expeditiously self-report and self-correct violations will receive more favorable treatment by DOJ. Companies that have robust compliance programs may identify violations before government agencies. Those companies should act with alacrity and remediate as soon as possible. In encouraging these responsible corporate behaviors, DOJ is not changing its policy but is instead laying out a clear marker of what is expected in what may be a stricter enforcement environment going forward. In several provisions of the Monaco Memorandum, the importance of compliance programs is highlighted, including the presence of strong internal controls to "detect and prevent” violations, escalation procedures when "red flags” are identified, and looking "at what happened in practice at a corporation – not just what is written down.”
- Past misconduct – "including previous criminal, civil, and regulatory resolutions” -- will be considered by DOJ. DAG Monaco warned that "repeated misconduct may be indicative of a corporation that operates without an appropriate compliance culture of institutional safeguards.” Although this aspect of the new DOJ policy is in accord with traditional law enforcement criteria, it seems that DOJ is also making clear that past offenders must be especially energetic in crafting and following appropriate compliance policies.
Implications for Bankruptcy and Other Non-compliance
The new DOJ corporate misconduct policies covering criminal prosecutions, considerations of deferred prosecution instead of guilty pleas, and cooperation credits in seeking punishment may be instructive in other contexts throughout the Department. After all, many factors that are cited in determining criminal enforcement actions likewise are present and weighed in civil actions as well.
It would not be hard to imagine, for example, that the USTP would be aggressive again in seeking corporate monitors as it did in the past. And although there would be many hurdles to overcome before a bankruptcy court could penalize a corporate employee directly, it would not be surprising for future bankruptcy compliance settlements to encourage claw-backs of compensation and new personnel policies that give more weight to compliance.
Conclusion
Large corporations and financial institutions will likely pay careful attention to the Monaco Memorandum with respect to all of its operations. Bankruptcy operations should not be spared from this heightened review. The memo reflects a tougher line on federal enforcement against corporate violators. If bankruptcy filings rise and violations of bankruptcy rules multiply, then federal enforcers may now have a few more arrows in their quiver when seeking appropriate remedies.
Commentary provided by Clifford J. White, Managing Director – Bankruptcy Compliance for AIS.
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The September 2022 official bankruptcy filing statistics bring to mind a musical oldie from Sonny and Cher, "The Beat Goes On.” The number of consumers and businesses seeking bankruptcy protection continues to trend upward as the economy grows more problematic and federal regulatory actions become more aggressive.
Overall, bankruptcy filings are up by more than seven percent compared to September 2021, led by another significant increase of more than 40 percent in chapter 13 filings (Figure 1). This is the second month in a row of an overall increase and the first back-to-back increase since January 2020, well over two years ago.
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Figure 1
Round Up of the Bankruptcy Filing Numbers
After two years of significant drops in bankruptcy filings, a new pattern is emerging with signs it may persist for quite a while. Although there undoubtedly will be zigs and zags along the way, more and more consumers and businesses appear to need bankruptcy protection. Chapter 13 filers, who are usually trying to retain their homes and automobiles, now constitute 44 percent of all filings. That far surpasses the historical norm of about one-third of all filings. That is due, in part, to drops in chapter 7 (liquidation) filings.
The number of chapter 11 cases, which are mainly businesses, skyrocketed again by more than 71 percent compared to the previous September and reached the highest monthly filing number in the last two years. In addition, small business filings using expedited subchapter V procedures rose by more than one-half and continue to represent about one-third of all chapter 11s.
To put matters into perspective, the data from six months ago looked much different. In March 2022, total filings over a twelve-month period were down by 16.5 percent. In contrast, in September 2022, the decrease was only seven percent, reflecting a significant increase over the past six months. Also, in March 2022, the comparison to filings in the same month in the previous year showed a drop of more than 17 percent, whereas in September, the overall numbers increased by seven percent.
National Economic and Regulatory Outlook
AIS does not have an econometric black box from which to project future national economic performance. But clearly, most economists are concerned about trends, even if not all the indicators are going in predictable directions. Again, to put matters into perspective, the prime rate charged for borrowing six months ago was 3.5 percent. By late September, it rose to 6.25 percent and may be going higher. Moreover, even though businesses are trying to hire more employees, the unemployment rate has edged upward from 3.6 percent in March to 3.7 percent, according to the latest Labor Department data.
Other data show similar conflicting signs. According to the Wall Street Journal, Morgan Stanley recently reported that more retail stores open than closed last year for the first time since 1995. At about the same time, the Federal Reserve issued a report by Michael Smolyansky linking interest rates with lower corporate profits and offering no encouragement for future performance.
All this helps show why there is a perceptible increase in bankruptcy filings and why those filings may continue to climb and quite possibly quite steeply. It is also hard to see why chapter 7s would stay below previous year filing numbers. The higher cost of living is almost bound to draw down household cash (which was built in part by unprecedented government transfers during the pandemic), providing the cushion allowing many consumers to avoid filing for chapter 7 relief.
As all of this is happening, federal regulatory actions against financial institutions seem to continue to ratchet up. Very recently, newspapers reported what appear to be unusually high penalties imposed for regulatory violations. For example, one regional bank was tagged with $191 million in payments for overdraft violations and a group of the largest financial sector firms was tagged with $2 billion payments for use of unauthorized messaging systems. Moreover, the Justice Department recently unveiled a tougher new policy governing criminal corporate compliance violations.
As filings increase and more attention is drawn to the plight of debtors, it is not hard to imagine greater regulatory scrutiny of default loan servicing to ensure that past violations and errors have not recurred since previous enforcement actions were taken.
Conclusion
If current bankruptcy filing trends hold, lenders should brace for a lot more default loan and bankruptcy servicing challenges. Filings are still only about one-half of the pre-COVID level, and no one knows if those previous norms will return. Over the last ten years, the financial industry (secured and unsecured) has invested heavily in automation and other compliance tools. But those systems have not been tested in a high bankruptcy filing environment. With filings headed upward, the national economy in a somewhat precarious state, and financial regulators acting aggressively, the testing may be about to begin.
Commentary provided by Clifford J. White, Managing Director – Bankruptcy Compliance for AIS.
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Each year, millions of Americans depend upon a transparent, efficient, and effective bankruptcy system. Besides about 400,000 debtors who seek a fresh start annually, millions of creditors rely on the bankruptcy process to obtain at least some repayment of money they are owed. Add to that the impact the bankruptcy system has on preserving value, saving jobs, and providing the opportunity for individual debtors to become productive members of the economy again, and it is no wonder that the Founders made enactment of a uniform system of bankruptcy laws one of the enumerated powers granted to Congress in the United States Constitution.
As debtors and creditors are well-aware, the bankruptcy system involves a lot of financial disclosure and compliance with rules. Failure to play by the rules may result in debtors losing their discharge of debts and creditors forfeiting their ability to receive a distribution. Beyond these and other civil consequences, certain egregious and fraudulent acts also may subject violators to criminal penalties, including incarceration.
The honesty and integrity of the bankruptcy system is so core to the general welfare and prosperity of the nation that Congress has enacted six sections in the Criminal Code identifying 18 crimes that apply specifically to bankruptcy. Those provisions are in addition to many other laws that bring certain bankruptcy-related conduct into the realm of criminal enforcement.
Department of JusticeEach year, the Justice Department’s United States Trustee Program (USTP) makes more than 2,000 referrals of suspected criminal conduct to United States Attorneys who may prosecute these cases. By law, the USTP must make referrals and assist in the prosecution. In addition to assigning about 25 of its attorneys to help prosecute bankruptcy crimes, the USTP also directs USTP lawyers and financial analysts to work with prosecutors on investigations, grand jury proceedings, and criminal trials.
To further enhance bankruptcy enforcement, the Justice Department has organized about 60 local bankruptcy fraud and related working groups consisting of multiple federal law enforcement agencies. The most prominent participants generally include the United States Attorneys, USTP, FBI, IRS, U.S. Postal Inspection Service, Social Security Administration, and the Department of Housing and Urban Development. These groups discuss local challenges (e.g., mortgage scams), enforcement strategies, and targets of investigation (subject to prescribed limitations on information-sharing).
By law, the USTP publishes an Annual Report of its criminal enforcement activities. The breakdown of referrals consistently shows that most crimes pertain to debtor misconduct, but far from all. The Annual Report compiles referrals into nearly 50 categories. The top five areas are tax fraud, false statements, bankruptcy fraud (e.g., continuing a fraudulent scheme by use of the bankruptcy process), concealment, and identity theft (e.g., use of false social security numbers).
Examples of Prosecutions
The following are examples of some recent prosecutions based upon USTP referrals:
- A payday loan servicer used personal information provided by customers to create false loan portfolios. The defendant then sold the portfolios to debt buyers who filed illegitimate proofs of claim in bankruptcy cases. The defendant collected more than $7 million from the sale of the false debts, lied to a bankruptcy court about the scheme, and ultimately pleaded guilty to several bankruptcy and non-bankruptcy crimes.
- The head of a New York-based private equity fund threatened economic harm to a potential competing buyer of bankruptcy estate assets. The misconduct was revealed by the competing bidder. The USTP conducted an immediate investigation and filed a comprehensive report in bankruptcy court that was the basis for the indictment and conviction. The defendant struck a quick plea agreement that included incarceration. On a positive note, the defendant has lectured at prominent law schools about the temptations to commit unethical acts in the heat of high-stakes financial and bankruptcy transactions.
- A debtor falsified bankruptcy documents by creating false liabilities in an attempt to show an inability to repay creditors and also concealed more than a million dollars in assets, including gold coins and bank deposits. Concealment cases are all too prevalent and have included hiding valuable assets ranging from jewelry to a Maserati to a chateau in France.
- A fraudster offered mortgage relief to homeowners facing foreclosure, received mortgage payments without trying to negotiate with the lender, and improperly filed a bankruptcy petition in the homeowner's name. The defendant defrauded more than 70 homeowners and was sentenced to 12 years in prison. Credit repair and mortgage relief schemes continue to be far too commonplace, harm lenders, and devastate families trying to save their homes. It has long been a focus on federal and state civil and criminal enforcement efforts.
- A consumer bankruptcy lawyer embezzled client funds, never performed services for which he was paid, and filed false documents in bankruptcy court. There was a large number of victimized clients, and not all of them could be identified because the lawyers destroyed client files. The bankruptcy lawyer was sentenced to 18 months in prison.
Conclusion
While it may seem that creditors are always in the regulatory crosshairs, most bankruptcy prosecutions involve debtor misconduct, and those convicted of bankruptcy crimes include wrongdoers from all walks of life. Bankruptcy criminals include not only debtors facing desperate financial circumstances but also many fraudsters who prey upon the financially vulnerable, attorneys and financial professionals, and even celebrities from the worlds of sports and entertainment. The victims of bankruptcy crimes often include both the debtor and creditors. And the list of victims always includes the integrity of the bankruptcy system on which the whole country depends.
If you have information about a possible bankruptcy crime, contact the USTP’s Bankruptcy Fraud Hotline at: USTP.Bankruptcy.Fraud@usdoj.gov.
Commentary provided by Clifford J. White, Managing Director – Bankruptcy Compliance for AIS.
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The August bankruptcy filing numbers are in. They not only reinforce the upward trend glimpsed in recent months but show an appreciable acceleration in filing rates. Moreover, government policy and general economic trends provide a reason to expect more of the same in the future.
What Do the Numbers Show?
Total bankruptcy filings in August 2022 totaled 35,375. That is a significant increase of 14.6 percent over July and nearly 9.6 percent over August 2021. This marks only the second time we have seen a year-over-year increase in monthly filings since the pandemic began in early 2020. Notably, the August increase was the largest since May 2010 when the economy was feeling the ill effects of the Great Recession.
Chapter 13 filings experienced a sizable increase of more than 15.4 percent from the previous month – and a whopping increase of more than 55 percent over August 2021. Chapter 7 filings were more mixed, with a significant 12.9 percent increase over July and a 10.9 decrease from August 2021. The previous drops in chapter 7 filings moderated in recent months, so it is no surprise to see an increase now. Although chapter 11s went up by nearly 90 percent from August over last month, many factors come into play that make analysis and predictions of future chapter 11 filings a bit harder.
Why Are Bankruptcy Filing Rates Rising?
Most commentators attribute steady chapter 13 increases to the resumption of foreclosures and evictions. Automobile repossessions likewise have been on the rise. Add to that inflation and interest rate hikes (which, among other things, make refinancing less viable) and employed consumers with secured debt may continue to find chapter 13 relief an increasingly attractive way to save their homes and cars while adopting a no-frills lifestyle.
Chapter 7 filings may have avoided similar significant upticks because of the lag time between the expiration of a record-breaking amount of government cash handed out during COVID and consumer debtors running out of money to pay their bills. According to the most recent Federal Reserve survey, consumer debt jumped by more than 10 percent in the quarter ending in June, with an even more significant 13 percent rise in credit card balances. Apart from the inevitable limit on credit available to middle and lower-income consumers, interest rates make borrowing for essential purchases more out of reach. It is hard to see how chapter 7s can avoid the upward trend we have seen in chapter 13s.
Although private equity continues to keep many businesses funded through more challenging times, the Creditor Rights Coalition recently highlighted a Morgan Stanley report saying that corporate economic strength may be flagging and the impact of interest rate hikes may "become more apparent in the coming quarters.” It is worth noting that not only did overall chapter 11 filings dramatically increase in August, but small business filings under the popular subchapter V streamlined procedures rose by 40 percent in August compared to both the previous month and to August 2021.
What Will Happen Next?
Predicting bankruptcy filings month-to-month or even year-to-year has proved to be an especially tricky business over the last few years. After all, despite twists and turns, annual filings have been at historic lows since the pandemic hit. But there is a paucity of objective data to suggest that the low filing environment is anything other than an aberration caused by extraordinary government actions. If filing rates merely returned to the stability we saw from 2016-2019; then filings could nearly double from the current lows.
A cursory review of general economic news, even if tempered by optimism that the Federal Reserve will guide the economy to a soft landing without a recession, reveals factors that may portend higher bankruptcy filing rates. For example, high inflation is persistent (even if it goes down a notch), the Federal Reserve probably will continue to maintain higher interest rates, consumer credit use has expanded, and the job market has softened.
What Does It All Mean?
The lending community needs to prepare for higher bankruptcy filing rates. If they do not, they run the risk of being flat-footed when the demands on default servicing operations similarly increase. In the aftermath of the economic meltdown more than a decade ago, many bankruptcy lawyers prospered, but many consumers were harmed by lender servicing practices that could not keep up with dramatically elevated delinquencies. As a result, financial institutions paid unprecedented amounts in settlements to customers, as well as to state and federal regulatory authorities.
It is not time to panic that bankruptcy filings will double and reach the pre-pandemic "normal.” But it is also no time to assume that current historically low filing rates will persist. Recent bankruptcy filing data show an upswing that may grow steeper and last a while longer.
Commentary provided by Clifford J. White, Managing Director – Bankruptcy Compliance for AIS.
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The Big Picture on Bankruptcy Filing Data
AIS Insight Reports provide the bankruptcy community with comprehensive bankruptcy filing data with helpful narrative explanations, as well as charts and graphs that help tell the story of the previous month’s filing patterns. This information allows stakeholders to drill down into the numbers to reach their own conclusions and perhaps factor the data into their own business forecasting.
Based off our customary data and analysis, we made the following observations:
- Chapter 13 filings continue turn in a higher direction. The number of chapter 13 cases filed in July, while slightly less than June, continued to show substantial growth when compared to the same month during the previous year and when compared to the previous 12-month period. Chapter 13 filings, which traditionally account for roughly 30 percent of all bankruptcy filings, are up nearly 40 percent year to date compared to January – July 2021.
- Chapter 7 filings continue to lag behind the previous year, but at a slower rate of decrease. Slowing trends (in either direction, up or down) are often a harbinger of a new pattern. In this case, the slowing decrease may provide a signal that chapter 7 filings will actually increase in the near or mid-term future.
- Because chapter 7 and 13 cases constitute such an overwhelming share of all bankruptcy cases, it is not surprising that the total decrease in filings in July is about 77 percent smaller than April. The percent decrease in overall filings from January to April 2022 was 17.5 percent; the overall decrease in July was a relatively modest 4.79 percent which followed the more recent pattern of the past three months.
Below you will find two graphs that illustrate these patterns.
Figure 1 shows weekly chapter 7 and chapter 13 filings with various gyrations. But the lines through weekly filings for each chapter show upward trends during this calendar year.
Figure 1
Figure 2 shows another telling point. Chapter 13 filings increased by an extraordinary 39.48 percent compared to the previous 12-month period.
Figure 2
Commentators like Ed Flynn, a premier expert on bankruptcy filing analysis at the American Bankruptcy Institute, suggest that total bankruptcy filings will finish this calendar year below last year’s low filing number. But mapping the filings by other than cumulative calendar year identifies patterns that may augur a future rise, at least in consumer filings.
Lastly, a recent study by the New York Federal Reserve Bank, which was widely reported in the financial press, notes that consumers are starting to take on more credit card debt as stimulus payments and other pandemic-related relief runs out. Historically, an increase in the amount of consumer debt, both in good times and bad, is a tell-tale sign of more bankruptcies to come.
That is more than enough data to digest for now. Financial institutions and other creditors plan far into the future. Possible changes in bankruptcy filings may need to weigh heavily in their forecasts.
To download the July Insight Report, click here.
Commentary provided by Clifford J. White, Managing Director – Bankruptcy Compliance for AIS.
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For some time now, Congress has been mainly known for gridlock and uncivil debate. But there have been many moments when Congress has come together in a bipartisan fashion to find solutions to long-standing problems. One of those moments occurred three years ago when members of both parties in both the House and Senate got together to pass the Small Business Reorganization Act (SBRA). Then a funny thing happened after the expansive new law was enacted – it worked exactly as intended.
Background
The SBRA was designed to address widely perceived problems that small businesses encountered when trying to reorganize under chapter 11 of the Bankruptcy Code. There was a developing consensus that chapter 11 was too costly and slow for businesses with modest assets which could not afford the financial drain and distraction of drawn-out bankruptcy processes. As a result, businesses that might be saved were dismantled and jobs unnecessarily lost.
The new law added a new voluntary subchapter V within chapter 11 for businesses holding less than $2.7 million in debt (adjusted annually for inflation). As an alternative to navigating the complex chapter 11 process, subchapter V provided streamlined procedures and tighter deadlines for debtors to develop a plan to rehabilitate the ailing business. The key substantive change under SBRA was the elimination of the "absolute priority rule” whereby the owners of the debtor-business had to pay creditors in full or lose their equity and control. This was a major downside for closely held and family businesses that lacked bankruptcy sophistication and did not want to unduly risk losing the enterprise they had worked a lifetime to build.
Among many other important changes, the new law also required the United States Trustee to appoint private trustees with a mandate to help ensure the filing of accurate financial information and to facilitate the filing of a consensual plan of reorganization. The trustee also is expected to identify businesses that cannot successfully reorganize and help move them to liquidation sooner before all the assets are dissipated.
There were major challenges in implementing the law. Not the least amongst those challenges was the USTP finding about 200 new trustees with business acumen. Although many existing trustees appointed under other chapters also were appointed under subchapter V, it was important to select businesspeople who would focus on finances, rather than lawyers who might focus on litigation. In addition, there was a lot of initial concern that debtors’ counsel would be reluctant to give up partial control of the case to an independent trustee whose mandate was to assist both debtors and creditors in finding a swift business solution.
The SBRA became effective in February 2020, just a month before much of the country shut down due to COVID. In an effort to assist more businesses facing economic hardships caused by the pandemic, Congress quickly expanded SBRA to cover businesses with up to $7.5 million in debt. That change increased the number of SBRA debtors by one-third. The higher debt limits were temporary for one year and later extended until June 2024.
Metrics of Success
The early results of SBRA were favorable and those trends have continued. Here are some of the key metrics of success:
- Three out of every four small business bankruptcy debtors choose to proceed under the expedited subchapter V process. This shows the popularity of the alternative among both small businesses and their bankruptcy counsel. To date about one-third of all chapter 11 cases are small businesses.
- Subchapter V small businesses confirm a reorganization plan at almost twice the historical rate for small businesses (56 percent vs. 31 percent.) In addition, more than 70 percent of the confirmations are consensual plans without creditor opposition. (There are no compilations of historical data on consensual plans in non-SBRA cases.)
- Subchapter V cases are dismissed at less than one-half the historical rate for small businesses (25 percent vs. 53 percent.) This suggests that subchapter V trustees are successfully helping smaller companies stay in business.
- Subchapter V cases are resolved more quickly and spend less time in bankruptcy. Subchapter V debtors confirm plans about 40 percent faster than the historical speed for small businesses (6.4 months vs. 10.8 months). Similarly, cases are dismissed more than 20 percent faster than the historical average (4.7 months vs. 6 months).
A few caveats are in order. The law is still fairly new so trends may not hold. Creditors also may want to crunch their internal numbers to compare their rate of recovery on debts under SBRA and the old system. Importantly, ultimate outcomes – such as whether companies that reorganize under SBRA complete their plan payments and remain viable over the long-term -- will require the passage of more time before they can be measured.
Conclusion
Government often-times seems broken, but sometimes it still works. All available objective data point to success so far for SBRA achieving the objectives Congress set when it passed the new law. Creditors may want to study their own internal results. Congress will need to evaluate longer-term experience before deciding whether to extend the higher debt limits when the current SBRA expansion expires in two years.
Commentary provided by Clifford J. White, Managing Director – Bankruptcy Compliance for AIS.
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Is the Era of Low Bankruptcy Filings About to End? This is the time to Prepare.
Bankruptcy filings have been at historic lows since the beginning of the COVID pandemic in 2020. But deteriorating national economic conditions and recent chapter 13 filing data suggest that bankruptcy increases may be on the horizon. If history is any guide, then more scrutiny of creditors’ compliance with bankruptcy and consumer protection laws and rules can be expected as well. All this may make it a good time for financial institutions and other creditors to review their bankruptcy processes to reduce the risk they will come under the regulatory microscope.
Historical Bankruptcy Filing Rates
Although predicting bankruptcy filing rates may be more hazardous than at any time in recent memory, it is worth noting that filings have been gyrating over many years. For example, 40 years ago bankruptcy filings stood at 380,000 cases. Last year, they reached about 414,000, or 18 percent above the low-water mark of the past five decades. But charting filing numbers between those years is a lot like drawing a rollercoaster.
The graph below (Figure 1) shows bankruptcy filing numbers for the past 20 years. In the 1990s, bankruptcy filings climbed above million. As the chart shows, they continued to climb until they exceeded two million cases in 2005. That number was somewhat artificial, however, because Congress sought to reduce the precipitous increase in filings by passing the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, which imposed a means test and made other significant changes in the law. Many lawyers tried to beat the effective date of the 2005 amendments by urging their clients to file sooner. Debtors did exactly that. Of course, that led to a sharp drop in filings the next year. Filings then began to rise to more normalized levels.
The next blip on the chart occurs in about 2008-2010 during the Great Recession when external economic conditions drove filings skyward. After that, filings leveled off and changed very little from about 2016-2019. Then the COVID pandemic hit. Many of us predicted that the pandemic would cause a large increase in filings. I was wrong. Instead, as Figure 1 shows, the numbers dropped – by a lot. In retrospect that is not surprising because the amount of government cash and other assistance, including foreclosure and eviction moratoria, were unprecedented. But there are new signs that filing patterns are changing.
Figure 1
Chapter 13 Filing Increases
Figure 2 charts the past 12 months of chapter 13 filings. Insofar as chapter 13 is designed for individuals with a regular income, many of whom have fallen behind on secured debt payments and still want to save their home or car, one might expect home foreclosure and eviction moratoria to influence filing rates strongly. Figure 1 suggests exactly that. The federal eviction moratoria generally ended last July. That is where our chart begins. As the trend line shows, chapter 13 file rates are up significantly over the past 12 months. Comparing January to June rates alone, the 2022 filing rates are 32 percent above the previous year.
In light of other economic conditions, this increase may forebode future increases as well, at least in chapter 13.
Figure 2
Deteriorating Economic Conditions
In addition to the expiration of government aid, which eventually will have an impact on many economically vulnerable consumers who were able to delay the day of financial reckoning, macroeconomic conditions are unfavorable. For the first time since the late 1970s through 1982, we are seeing high inflation, rising interest rates, and perhaps slowing economic growth. In early June of this year, the World Bank (along with many economic mavens) warned of "stagflation.” And Chase CEO Jamie Dimon said there is an economic "hurricane” heading our way. Since those prognostications were uttered, national economic data have not painted a brighter picture.
Reduce Regulatory Risk
The last time we faced a sharp economic downturn, federal regulators enhanced their scrutiny of bankruptcy and other creditor practices. Among things, this culminated in a $25 billion national mortgage settlement and many other multi-million-dollar bankruptcy settlements pertaining to the accuracy of proofs of claim for secured and unsecured debt alike. Perhaps more expensive in the long-run than remediation to consumer debtors, regulatory relief sometimes entailed injunctive relief (e.g., monitors to review internal creditor practices) and severe reputational damage.With filings still relatively low, and regulatory actions concomitantly lower, this may be a good time for creditors to perform a check-up on their bankruptcy compliance systems to make sure they can withstand future regulatory scrutiny.
Conclusion
All reputable creditors want to treat consumer fairly and in compliance with law. But even the best of systems for handling distressed accounts need a check-up every now and again to be sure faulty practices did not seep in. Now may be a good time for a regulatory refresh before Jamie Dimons’s predicted "hurricane” hits consumers and creditors alike.
To download the June Insight Report, click here.
Commentary provided by Clifford J. White, Managing Director – Bankruptcy Compliance for AIS.
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The United States Supreme Court recently decided the case of Siegal v. Fitzgerald-- and for only the second time in history-- struck down a bankruptcy law on the seemingly technical ground that a fee imposed on chapter 11 debtors violated the constitutional requirement that bankruptcy laws be uniform. Although the issue may seem somewhat esoteric, its implications may be far-reaching, especially for creditors in Alabama and North Carolina. Here’s why:
Under Article I, Section 8 of the Constitution, Congress may establish "uniform laws on the subject of bankruptcy.” But in 1986, Congress allowed bankruptcy courts in six judicial districts in Alabama and North Carolina to control bankruptcy administration in place of Justice Department’s United States Trustee Program (USTP), which oversees bankruptcy cases and enforces bankruptcy laws in the other 88 judicial districts around the country. Among the USTP administrative duties is the mandate to collect quarterly fees in chapter 11 cases. When Congress increased those fees to offset the costs of both bankruptcy courts and the USTP, it left open a statutory loophole that the courts in the six districts thought allowed them to delay collection. Although the Supreme Court found "ample evidence” that Congress intended the fees to be collected nationwide, the disparity in fee collection practices meant that the fee statute itself was fatally non-uniform.
Beyond the issue of how to remedy the disparity – which puts at stake more than $300 million in increased fees that the USTP properly collected – is the issue of whether Congress also acted unconstitutionally back in 1986 when it passed a statute allowing the bankruptcy courts in the six judicial districts in Alabama and North Carolina to opt out of the USTP system.
This is where the implications for creditors and all stakeholders in bankruptcy cases come into play. Although the Bankruptcy Code, from creditor rights to penalties for violations of bankruptcy law, applies everywhere, it is fair to say that the USTP has been more vigorous in identifying violations and going to court to impose remedies against debtors, creditors, lawyers, and others involved in bankruptcy cases. It sounds confusing, but the USTP brings legal actions, much like a prosecutor, and judges decide the case and order relief (e.g., fines, injunctions). In districts where the USTP lacks jurisdiction, a court functionary called a Bankruptcy Administrator (BA) plays a similar role. Not surprisingly, the USTP as a DOJ agency places greater emphasis on investigation and litigation than the courts whose primary responsibility is to adjudicate disputes that are presented to them.
For most other administrative and regulatory matters, such as prescribing financial reporting for chapter 11 business debtors and approving creditor counselors who provide a mandatory financial curse to almost all individual debtors, the BAs largely piggy-back onto the U.S. Trustees’ way of doing things anyway. The big exception is that the U.S. Trustees are independent of the judiciary, centrally directed, follow consistent priorities, and more vigorously enforce the bankruptcy laws. In contrast, the BAs are creatures of a handful of bankruptcy judges. That is why the USTP was able, for example, to review 37,000 bankruptcy filings, litigate 300 discovery objections from financial institutions, and participate in the DOJ-led $25 billion National Mortgage Settlement of a decade ago. Judges simply are not equipped to target law firms, banks, and other who operate nationwide and systematically violate the Bankruptcy Code and Rules.
Although the primary impact of a merger of the BAs into the USTP will be those operating within the six judicial districts, the mandate for uniformity also will cascade into other areas where there are differences in bankruptcy practices. With DOJ and the USTP atop the entire administrative system, one can expect a push for more consistent practices in a wide range of areas and more consistent application of the law.
Although it will be a hard management task for the new Director of the USTP (the previous Director retired after serving 17 years at the helm – and then joined AIS) to integrate the BAs into the US Trustee system and inculcating the DOJ way of doing things, it also may make for a more consistent and constitutionally permissible system going forward. It also probably means stricter enforcement and maybe a lot more scrutiny of creditors who operate mainly in Alabama and North Carolina.
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June 9th, 2022
MAY INSIGHT REPORT
Bankruptcy filings totaled 31,292 in May, down 3.79% from April. May filings marked a 10.05% decrease year over year when compared to the 34,789 seen in May 2021 (Figure 1).
Chapter 11 filings were up 26.01% from April and 21.50% from the same month last year (Figure 1). Furthermore, Chapter 11, Subchapter V filings totaled 122, revealing a 22% increase from April 2022 and a 6.09% increase from May 2021 (Figure 1).
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Over the past two years, we’ve been watching the activity of Chapter 7 and Chapter 13 filings closely. Chapter 7 filings totaled 18,746 revealing a 6.27% decrease from April 2022 and a 27.81% decrease from May 2021 (Figure 4). Chapter 13 filings totaled 12,187, showing no change from April 2022 and a 43.94% increase from May 2021 (Figure 4).
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For the month of May 2022, Chapter 11 filings totaled 374, resulting in a 26.35% increase from April 2022 and a 21.82% rise from May 2021 (Figure 7). Chapter 11, Subchapter V filings totaled 122, marking a 22% increase from April 2022 and a 6.09% rise from the same month last year (Figure 7).
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The highest percentage of bankruptcies for May 2022 came from the South (East) (28%), followed by North Central (East) (20%), South (West) (16%), Northeast (12%), Pacific (12%), North Central (West) (6%), and Mountain (6%) regions of the country (Figure 10).
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To download the May Insight Report, click here.
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May 5th, 2022
APRIL INSIGHT REPORT
According to the latest AIS Insight Report, April filings totaled 32,523, down 9.70% from the previous month and down 20.46% from April 2021 (Figure 1). In addition, April 2022 marks a 30.76% increase in Chapter 13 filings when compared to April 2021 (Figure 1).
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Over the past two years, we’ve been watching the activity of Chapter 7 and Chapter 13 filings closely. Chapter 7 filings totaled 19,999, showing a 11.08% decrease from last month and a 35.87% decrease from April 2021 (Figure 4). On the other hand, Chapter 13 filings totaled 12,187, revealing a 5.77% decrease from last month and 30.76% increase from April 2021 (Figure 4).
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For the month of April 2022, Chapter 11 filings totaled 296, revealing a 22.31% decrease from the previous month and a 14.94% decrease from April 2021 (Figure 7). Chapter 11, Subchapter V filings totaled 100, revealing a 45.95% decrease from the previous month and a 29.08% decrease from April 2021 (Figure 7).
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The highest percentage of bankruptcies for April 2022 came from the South (East) (28%), followed by North Central (East) (21%), South (West) (15%), Pacific (12%), Northeast (12%), North Central (West) (6%), and Mountain (6%) regions of the country (Figure 10).
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To download the April Insight Report, click here.
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April 6th, 2022
MARCH INSIGHT REPORT
According to the latest AIS Insight Report, March filings totaled 36,015, up 33.40% from the previous month and down 17.11% from March 2022 (Figure 1). Although this is the lowest number of total filings for the month of March in over 20 years, March 2022 marks the largest number of filings since April 2021.
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Over the past two years, we’ve been watching the activity of Chapter 7 and Chapter 13 filings closely. Our March analysis reveals the largest number of Chapter 7 filings since June 2021 and the largest number of Chapter 13 filings since March 2020. Chapter 7 filings totaled 22,676, showing a 41.27% increase from last month and a 29.77% decrease from March 2021. Chapter 13 filings totaled 12,933, showing a 21.22% increase from the previous month and a 21.61% increase from March 2021.
On March 14th, legislation was introduced in the Senate that would expand the eligibility requirements for Chapter 13. This is a very significant change in the law and should increase Chapter 13 filings. We’ll continue to provide updates on when the bill passes the senate and house.
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For the month of March 2022, Chapter 11 filings totaled 381, revealing a 43.23% increase from the previous month and a 15.71% decrease from March 2021. Chapter 11, Subchapter V filings totaled 185, revealing a 45.67% increase from the previous month and a 4.15% decrease from March 2021.
The legislation introduced in the Senate on March 14th also makes the increased debt limit permanent for Subchapter V (small business bankruptcy), which is due to expire on March 27, 2022. As a result, we expect Congress will attempt to pass this bill soon to avoid a lapse in the small business provision.
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The highest percentage of bankruptcies for March 2022 came from the South (East) (28%), followed by North Central (East) (21%), South (West) (15%), Pacific (12%), Northeast (12%), North Central (West) (6%), and Mountain (6%) regions of the country (Figure 10).
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To download the March Insight Report, click here.
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March 3rd, 2022
FEBRUARY INSIGHT REPORT
According to the latest AIS Insight Report, February filings totaled 26,997, up 3% from the previous month and down 13.54% from February 2021 (Figure 1).
Over the last four months, Chapter 13’s have remained relatively flat, averaging approximately 10,600 filings per month (Figure 1). However, February’s count reached 10,669 which showed a 24.91% increase from the same month last year (Figure 1).
Our analysis reveals that Chapter 7 filings totaled 16,051, marking the end of a 10-month decline (Figure 1). Interestingly, we also witnessed a 19.81% increase in Chapter 11, Subchapter V filings when compared to the previous month (Figure 1)..JPG)
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Over the past two years, we’ve been watching the activity of Chapter 7 and Chapter 13 filings closely. Our February analysis reveals that after 10 consecutive months of declining Chapter 7 filings, we’re finally seeing a slight increase. Chapter 7 filings totaled 16,051 (Figure 4). On the other hand, Chapter 13 filings totaled 10,699, showing a slight decrease from last month and following the inconsistent pattern we’ve been watching in Chapter 13 filings over the past five months (Figure 4).
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For the month of February 2022, Chapter 11 filings decreased 3.27% from January 2022 totaling 266 (Figure 7). On the other hand, when compared to the previous month, Chapter 11, Subchapter V filings increased by 19.81%, 2022 totaling 127 (Figure 7). This marks the largest number of filings since April 2021 (Figure 7).
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The highest percentage of bankruptcies for February 2022 came from the South (East) (30%), followed by North Central (East) (19%), South (West) (15%), Pacific (13%), Northeast (12%), North Central (West) (6%), and Mountain (5%) regions of the country (Figure 10).
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To download the February Insight Report, click here.
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February 7th, 2022
JANUARY INSIGHT REPORT
According to the latest AIS Insight Report, January filings totaled 26,203, down 6.24% from the previous month and 18.97% from January 2021 (Figure 1). This marks the lowest number of filings for the month of January in more than 20 years.
Chapter 7 filings (15,182) continue to decline for the 10-consecutive month while Chapter 13s accounted for 40.93% of all filings, an increase of 12.75% from January 2021 (Figure 1).
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We’ve continued to monitor the activity of Chapter 7 and Chapter 13 bankruptcy filings. Our analysis reveals that Chapter 7 filings totaled 15,182, declining for 10 consecutive months (Figure 4). On the other hand, Chapter 13 filings totaled 10,724 (Figure 4). Chapter 13 filings continue to follow an inconsistent pattern of filings (Figure 4). Experts believe the consecutive decline in Chapter 7s can be attributed to stimulus and forbearance programs, allowing more debtors to seek protection under Chapter 13 bankruptcy.
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For the month of January 2022, Chapter 11 filings decreased 23.39% from December 2021 totaling 359 (Figure 7). Chapter 11, Subchapter V filings increased 19.10% from December 2021 totaling 89 (Figure 7).
When comparing Chapter 11 filings from January 2021 to January 2022, we observed a 47.31% decrease (Figure 7). Whereas, when comparing Chapter 11, Subchapter V filings from January 2021 to January 2022, we saw a 8.16% increase in filings (Figure 7).
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The highest percentage of bankruptcies for January 2022 came from the South (East) (30%), followed by North Central (East) (19%), South (West) (16%), Pacific (13%), Northeast (11%), Mountain (6%), and North Central (West) (5%) regions of the country (Figure 10).
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Since the commencement of COVID, the numerous stimulus packages coupled with federal and state moratoriums on foreclosure and repossessions, forbearances and deferments, government assistance has acted as the alternative means of coping with financial distress rather than the protections offered by various forms of Bankruptcy.
While congress contemplates changes to the Bankruptcy Code, including dischargeability of at least some government, backed student debt, and many stimulus benefits come to an end, the expectation among bankruptcy practitioners has long been that there will be a rise and a dramatic rise in filings, especially in the area of consumer bankruptcy.
Precisely when this rise will come or how dramatic it will be will remain the unanswered question. Congressional actions regarding student loans or other potential strengthening of consumer rights under the code may make filing more appealing and beneficial.
Whether the increase in bankruptcy filings and potential legislation is coming in the next quarter or the next year remains a strongly debated issue, but one without any clear conclusions.
The one fact on which all seem to agree is that the many government stimulus programs haven’t cured but merely delayed the need for bankruptcy relief.
To download the January Insight Report, click here.
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January 5th, 2021
DECEMBER INSIGHT REPORT
According to the latest AIS Insight report, December bankruptcies totaled 27,946, reflecting a slight decline from the previous month (Figure 1). This is the lowest total filings since January 2006.
December 2021 marks two full years of bankruptcy data during the COVID-19 pandemic. According to the AIS Insight report total filings across all chapters for the year of 2021 totaled 401,398. When compared to 2020, it was noted that total bankruptcies were down 24.13% (Figure 1).
Although we continue to see the majority of bankruptcy filings decline, we did observe an increase in Chapter 11 filings for the month of November 2021 (Figure 1).
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Our analysis of Chapter 7 and Chapter 13 bankruptcies reveals that numbers continue to stay below historical averages (Figure 4). Chapter 7 filings totaled 17,187, marking a 6.55% decrease from November 2021 and a 28.71% decrease when compared to December 2020 (Figure 4). This is now the tenth consecutive month that we’ve observed declining Chapter 7 filings. Chapter 13 filings totaled 10,374, marking a 2.78% decrease from November 2021 and a 6.89% increase from December 2020 (Figure 4).
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For the month of December 2021, Chapter 11 filings increased 61% from November 2021 totaling 359 (Figure 7). Chapter 11, Subchapter V filings decreased 15.23% from November 2021 totaling 89 (Figure 7).
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The highest percentage of bankruptcies for December 2021 came from the South (East) (29%), followed by North Central (East) (19%), South (West) (16%), Pacific (13%), Northeast (11%), North Central (West) (6%) and Mountain (6%) regions of the country (Figure 10).
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To download the December Insight Report, click here.
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December 6th, 2021
NOVEMBER INSIGHT REPORT
AIS reports that November bankruptcy filings totaled 29,301, marking a year-over-year decrease of 15.05% and a 47.67% decrease when compared to pre-pandemic data (November 2019) (Figure 1). Through November 2021 bankruptcy filings for all chapters totaled 407,784, down 25.56% over the same period last year. The slight decrease (6.93%) from October to November is in line with the seasonality we see each year with filings.
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Our analysis of Chapter 7 and Chapter 13 bankruptcies reveals that numbers continue to stay below historical averages (Figure 4). Chapter 7 filings totaled 18,392, marking a 7.84% decrease from October 2021 and a 24.45% decrease when compared to November 2020 (Figure 4). This is the ninth consecutive month for declining Chapter 7 filings. On the other hand, Chapter 13 filings totaled 10,671, marking a 4.39% decrease from October 2021. This marks the first month in the last sixth consecutive months where Chapter 13 filings decreased. Finally, we’d like to note that when compared to November 2020, we’re seeing a 13.63% increase in Chapter 13 filings (Figure 4).
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For the month of November 2021, Chapter 11 filings decreased 35.65% from October 2021 totaling 222 (Figure 7). Which is a drastic decrease from November 2020 when total filings totaled 696. Chapter 11, Subchapter V filings increased by 0.96% from October 2021 totaling 105 (Figure 7).
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The highest percentage of bankruptcies for November 2021 came from the South (East) (28%), followed by North Central (East) (20%), South (West) (16%), Pacific (13%), Northeast (11%), North Central (West) (6%) and Mountain (6%) regions of the country (Figure 10).
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To download the November Insight Report, click here.
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November 8th, 2021
OCTOBER INSIGHT REPORT
According to the latest AIS Insight Report, October bankruptcy filings totaled 31,483, marking a year-over-year decrease of 21.76% and a 53.57% decrease when compared to pre-pandemic data (October 2019). The 11,161 chapter 13 filings in October represent a 8.70% increase from the previous month and a 32.47% since May. This is the fifth consecutive month that we have seen a rise in chapter 13s. Total consumer filings are down 24.93% YTD while commercial filings have decreased 40.20% YTD. The slight increase (1.81%) from September to October is in line with the seasonality we see each year with filings.
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Figure 3
Our analysis of Chapter 13 and Chapter 7 bankruptcies reveals that numbers continue to stay below historical averages (Figure 4). However, as we mentioned, the 11,161 Chapter 13 filings in October represent a 8.70% increase from the previous month and a 32.47% since May (Figure 4). This is the fifth consecutive month that we have seen a rise in chapter 13s. Chapter 7 filings in October represent a 1.77% decrease from the previous month (Figure 4).
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Figure 4
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Figure 5
Figure 6
For the month of October 2021, Chapter 11 filings increased 17.7% from September 2021 totaling 293 (Figure 7). In addition, Chapter 11, Subchapter V filings increased 6.1% from September 2021 totaling 98 (Figure 7). However, when comparing the monthly totals to October 2020, we observed a 44% decrease in Chapter 11 filings and a 31% decrease in Chapter 11, Subchapter V filings (Figure 7).
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Figure 7
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Figure 8
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Figure 9
The highest percentage of bankruptcies for October 2021 came from the South (East) (29%), followed by North Central (East) (20%), South (West) (15%), Pacific (13%), Northeast (11%), North Central (West) (6%) and Mountain (6%) regions of the country (Figure 10).
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Figure 10
To download the October Insight Report, click here.
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