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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.

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.

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.

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.

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.

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. 

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.

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 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.

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.