Bankruptcy Filings Continue Double-Digit Increases in the New Year

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, Senior Advisor - Bankruptcy Compliance for AIS.