RESOURCE CENTER

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: 

Take the time to vet potential partners and ensure they align with your needs and values. Leaning on the guidance and expertise of the right bankruptcy service provider can give you peace of mind that your operations are in compliance and costs are controlled.

 

 

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.

In essence, the benefits of a strategic BPO partnership go beyond operational streamlining. It's about ensuring businesses are equipped with the tools, insights, and strategies to thrive in an ever-evolving marketplace. For those aiming for unparalleled growth and operational distinction, a foray into the world of BPO is a strategic move toward future success. 

 

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.

 

 

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  

 

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.

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. 

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.

 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.

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. 

 

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.

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.

Navigating a transformative journey, especially in uncertain times, is no small feat. Yet, with a strategic 90-day plan, financial service providers can not only weather the storm but come out stronger, more efficient, and more profitable. Remember, it's not just about transformation; it's about doing it right and doing it efficiently.

 

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. 

 

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.  

 

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.

 

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.

 

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.

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.

 

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). 

The News Is Not Better for Consumer Credit

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.

 

With the number of bankruptcy filings now in for the first calendar quarter of 2023, we know that the rapid rise in the number of individuals and companies seeking bankruptcy relief continues unabated. From January through March of this year, 18.1 percent more bankruptcy petitions were filed compared to the same period in 2022. In March alone, overall filings increased by 17.5 percent. This is the eighth consecutive month of year-over-year filing increases. And there may be no looking back.   

Bankruptcy Filings Under All Major Chapters 
Total bankruptcy filings reached 42,552 in March. The growth in chapter 13 filings made up the majority the increase.  Here is a breakdown by chapter: After plummeting due to the pandemic, chapter 7s began to rise last year, and now the pace of increases persists in the double digits. In March, chapter 7 filings jumped by 12.1 percent, likely validating predictions last year that the end of COVID-era cash assistance would lead to more bankruptcy filings.                   

The significant increases in chapter 13 filings continue unabated. In March, chapter 13 filings rose by 25.9 percent compared to last year. The size of the increases is surprising given the torrid pace at which chapter 13 rose throughout most of 2022 and into the current year.           

Chapter 11 filings steeply climbed by more than 70 percent in March. The increase was somewhat inflated by one week, during which two debtors with many affiliates filed.1 But even considering those misleading numbers, chapter 11s are still on a steep skyward trajectory. Perhaps unexpectedly, small business Subchapter V cases remained steady but did not increase over last March’s number. Overall, chapter 11 filing numbers suggest that businesses are facing some significant headwinds and require a bankruptcy breathing spell to have chance to reorganize their debts and return to profitability.

The bar chart below shows the first quarter growth in overall filings.

 

The table below provides the chapter-by-chapter breakdown.  

 

 

* Total bankruptcies include chapters 9, 12 and 15

Turbulence in the Banking Sector
On March 22nd, AIS posted a quick review of some consequences of, and questions posed by, the spectacular failures of Silicon Valley Bank and Signature Bank. During the intervening weeks, one major question was answered: the Federal Reserve decided to continue to increase interest rates. With warning signs of further financial turbulence, including a possible slow-down in lending as banks shore up their balance sheets and take other measures to avoid a run on deposits or regulatory action, consumers and businesses may have fewer ways to stay afloat and avoid bankruptcy.   

Added to these negative economic signs, credit card and automobile loan delinquencies are way up, the commercial real estate market is nearing crisis, and American home values are past their peak. Easing inflation is a good sign, but prices are still rising at more than the Federal Reserve’s long-stated target of two percent.   

While there remains hope of a soft landing and avoiding recession, the economy is in transition from the unsustainable growth of government spending and other emergency government action taken during the pandemic.   

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.

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.

  

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 Increases

The 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.