Bankruptcy Filings Continue Year Over Year Increases

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, Senior Advisor - Bankruptcy Compliance for AIS.