Bankruptcy Filings Increase at Slower Pace

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 Projections

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, Senior Advisor - Bankruptcy Compliance for AIS.