Bankruptcy Filings Increase by 6.26 Percent in November

The number of debtors who filed bankruptcy in November 2024 increased compared to last November, but at a moderate pace of 6.26 percent. In total, 40,276 consumer and commercial debtors sought bankruptcy relief last month. The number of chapter 7 liquidation cases went up by a double-digit percentage, but chapter 13 consumer repayment cases decreased ever so slightly by 0.69 percent. The number of chapter 11 business reorganizations was also down, but only because an abnormally large number of chapter 11 cases were filed last November.

A Closer Look by Chapter

Consumers and businesses seeking to wipe out all their debts by giving up most of their property under chapter 7 continued to file in significantly higher numbers. Compared to November 2023, chapter 7 filings rose by 11.82 percent. This reflects a consistent pattern seen during most months over the past two years.

Chapter 13 repayment cases fell by a tiny 0.69 percent. This is the first decrease in chapter 13 filings since March 2023, but reflects a continued slowing in growth in chapter 13 filings as chapter 7s have boomed upward. This may mean that fewer consumers in distress have property to retain or they are better able to refinance existing secured debts on homes and cars.

Although the number of chapter 11 filings fell by 12.8 percent last month compared to the previous November, that was due to the huge number of affiliates that filed in November 2023 along with their office leasing company parent, WeWork. Factoring out more than 500 WeWork filings, the number of chapter 11s actually DOUBLED compared to the same month last year. That would suggest continued strong demand for bankruptcy relief by commercial enterprises.

The increase of 25.79 percent in small business subchapter V filings was somewhat surprising because about one-third fewer companies are now eligible under lower debt limits that took effect in June. Some commentators have said that Small Business Administration and other pandemic-era loans are coming due in increasing numbers and that may be driving subchapter V filings.

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Post-Election Potpourri

Washington, D.C. is still agog about what will happen under the Trump Administration, from new appointments to policy to regulations. That preoccupation will not end anytime soon. As things sort themselves out, and they always do, here are a few salient developments over the past month that may affect lenders and impact the world of bankruptcy and distressed debt.

Appointments: We reported last month on key regulatory positions and possible personnel changes. Although President-elect Trump has been fast out of the gate to announce Cabinet and some other nominations, many more announcements are yet to come. It is likely that most sub-Cabinet and important regulatory slots will come after Cabinet nominees are confirmed.

Of perhaps greatest interest, Federal Reserve Chair Jerome Powell said at a news conference after announcing the Fed’s decision to lower interest rates by another quarter-point that he would not resign his position before his term as Chair expires in May 2026. There has been speculation that President Trump may oust Powell sooner than that despite the lack of clear legal authority to remove a sitting Fed Chair. His announced intention to nominate Wall Street veteran Scott Bessent as Treasury Secretary has generally pleased financial markets and perhaps signaled a deliberate approach to decisions about future economic appointments.
Despite the openness of the new Administration to rein in certain business practices that arguably harm consumers, it still seems likely that super-aggressive regulators appointed by President Biden at the Federal Trade Commission (Chair Lina Khan) and Consumer Financial Protection Bureau (Director Rohit Chopra) will be terminated unless they voluntarily resign sooner. In any event, it seems unlikely that Khan or Chopra would want to serve much beyond Inauguration Day.

Regulatory Policy: Before and during the campaign, the President-elect and running-mate J.D. Vance had struck both de-regulatory and populist notes about antitrust and other economic policies. The daily Politico (11/26/24) newspaper reported that both Senators Bernie Sanders and Elizabeth Warren have expressed interest in working with the new Administration on capping credit card interest rates at 10 percent, as the President-elect had suggested he may want to do.

I participated in a conference last month sponsored by the Association Insolvency and Restructuring Advisors where panelists presented eye-popping data about the growth in private credit. About 25 percent of all outstanding commercial and industrial debt was loaned by non-bank lenders. That was attributed to Biden Administration regulations that limited bank activity. If those rules are loosened in the next Administration, then banks may be able to make more (and riskier?) loans. In the short-term, that may provide a life-line to struggling businesses.

Influences on Bankruptcy Filing Rates: Even though the success of a new President’s economic policies may have a profound effect on bankruptcy filing rates, it usually takes some time before new policies work through the national economy. In the meantime, here are some factors that may influence bankruptcy filing rates in the shorter-term:

The Household Debt survey showed a continued modest upward arc in the total amount of household debt. In addition, auto loan and mortgage delinquencies increased, but credit card delinquencies were flat. (New York Fed, 11/13/24)
As shown in this and previous AIS monthly reports above, consumer bankruptcies continue to spiral higher. Professor Robert Lawless of the University of Illinois Law School and other bankruptcy experts noted that usually “people are struggling with their debt for more than two years” before filing for bankruptcy. For many, the loss of pandemic-era cash assistance finally caught up with them. (News via ABI daily headlines, 11/25/24.) Given the proclivity of most consumer debtors to delay filing, we could be in for a prolonged spell of increased filings.
Many of the Biden Administration’s student loan debt relief programs can be expected to be repealed by the new Administration. New initiatives may be stopped soon, but repealing established regulations may require a lengthy administrative process. To the extent that student loan forgiveness lessened the need to discharge other kinds of debts, bankruptcy relief may soon be needed by more consumer borrowers.

Conclusion

Bankruptcy filings continue to increase, but with a distinctly different pattern than we saw at the beginning of the year. Chapter 7 is far more popular in relation to chapter 13 repayment plans for most consumers. The number of small business subchapter V filings has shown greater resiliency than it did in the months immediately after the debt limits suddenly dropped. Larger chapter 11 cases showed a decrease, but only because last November’s filing number was artificially inflated by the astronomical number of affiliates that filed as part of the WeWork cases.

With many new federal regulators taking the helm in the New Year and with recent trends in the mix of bankruptcy cases, lenders may need to take a fresh look at distressed portfolios to see if any forecasts need to change along with the national political and economic environment.