Are Bankruptcies Rising or Exploding?

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, Senior Advisor - Bankruptcy Compliance for AIS.