Bankruptcy Filings Continue to Creep Ahead of Last Year’s Pace

Tis the Season to spend, spend, spend. And our fellow Americans did their part to buoy the demand-side of the economy with record holiday spending on Black Friday. With the credit card bills not coming due until next year, and with foreclosures soon pausing in the run-up to the holidays, it should be less urgent for consumers to file bankruptcy over the next several weeks.

November bankruptcy filings nonetheless followed the pattern of the past several months by creeping ahead of last year’s pace. The 31,162 bankruptcy cases filed under all chapters of the Bankruptcy Code reflected a 6.2 percent increase over last November’s filing number. This is the fourth consecutive month in which overall filings were above the same month in the previous year. As expected, however, November filings were 4.7 percent lower than October and are likely to follow the traditional seasonal pattern of being lower in December, as well.

Based on historical patterns, we are probably in for a few month-over-month declines. So the key indicator for the future is the comparison to filings in the same month of the previous year. And on that score, filing data over the last several months suggests that a significant upward shift in bankruptcies will persist.

Drilling down a bit more, chapter 13 wage-earner repayment plans were up by 27 percent over November 2021. For the last 12 months, chapter 13s have risen by more than one-third. Chapter 7 liquidations dropped by six percent compared to last November, while chapter 11 reorganizations rose by 69 percent. Subchapter V small business reorganizations increased by 13 percent over last November.

Over the last 12 months, bankruptcy filings decreased by 6.6 percent, but that gap closed considerably over the past several months. Lenders also are taking note of the increase in credit usage. For example, consumer confidence brightened as the holiday season arrived and Black Friday shopping broke a new record. But on the downside, the amount of purchases put on credit cards also moved skyward. That fits other economic trend data that banks and other lenders have been following closely.

Similar patterns can be seen in other macroeconomic measures. Interest rates continue a steep upward climb, although there is hope the increases will start to moderate soon. But it is hard to be giddy when inflation stands at 7.7 percent for this year, which is still three points higher than the rate of a year ago.

Over the last month, there were also numerous developments in the election and government policy spheres that could influence bankruptcy filing rates. Here are three among many developments that may be worth pondering:

Few political prognosticators predicted the outcome of the November 8th election. Exit polls showed Republicans winning on most issues of concern to voters, but Democrats kept their Senate majority and barely lost their House of Representatives majority. This probably means that there will be little meaningful legislative activity, including on bankruptcy, until after the next Presidential election. Some wags might be justified in saying that the beleaguered electorate likes gridlock and many businesses might benefit from that, too.
A pause in Congressional law-making does not necessarily mean that all will be quiet on the regulatory front. One may recall recent history when the executive branch grew restless in the face of legislative stalemate and doubled down on their exercise of regulatory authorities. In this regard, it will be interesting to see if the Consumer Financial Protection Board (CFPB) picks it enforcement battles more carefully in light of its recent major loss in the United States Court of Appeals for the Fifth Circuit. In Community Financial Services Association of America v. CFPB, the appeals court struck down a CFPB rule-making authority on grounds that the agency’s funding mechanism, which does not require Congressional appropriations, is unconstitutional. The U.S. Department of Justice is seeking reversal of the decision in the Supreme Court.
The Justice Department (DOJ) also took a major step to relieve student loan borrowers of their repayment obligations if they file for bankruptcy. Currently, debtors with high student loan balances often do not file because that debt is generally not dischargeable in bankruptcy. If more debt-ladened students file, then not only will student loan debts be discharged, but so will credit card and other debts.

To effect the more generous loan forgiveness policy, DOJ established more sympathetic criteria for the government to use in determining whether the statutory "undue hardship” standard for discharge of student loan debts is satisfied. If the government now more readily agrees with the debtor that repayment would impose an "undue hardship,” then it is far more likely that the bankruptcy court will grant the discharge. This should make bankruptcy a more attractive option for students, as well as their parents and grandparents who took out the loans on the students’ behalf, who cannot keep up with their bills.

Some observers think that the administrative paperwork requirements imposed under the new DOJ procedures may discourage student loan borrowers from applying for the better treatment. Some cynics think the major beneficiaries of the policy may be debtors’ lawyers who may get to charge another $1000 or so to complete the paperwork and deal with DOJ. In any event, the new policy probably will increase filings at least modestly and potentially more than modestly.

History suggests that we can expect a lull in filings over the holidays. But there is scant evidence to suggest we can rely on that lull to continue very far into 2023. Add to that the many uncertainties about regulatory policy and the financial community has much to ponder as we race towards the end of the year. Enjoy the holidays and strap on your seat belts for the ride to come in 2023.

Commentary provided by Clifford J. White, Senior Advisor - Bankruptcy Compliance for AIS.