Bankruptcy Filings Leaped by 24.4 Percent in July

Following a modest increase in June, July saw a significant 24.4 percent surge in bankruptcy filings compared to the same month last year. Year-to-date, filings have risen by 16.7 percent, trending towards a return to pre-pandemic levels by 2026.

A Closer Look by Chapter

Filings were up substantially for all major chapters of the Code.

Chapter 7 filings surged by 29.6 percent, the fourth month this year, with increases exceeding 20 percent. These liquidations encompass both consumer and business cases, predominantly affecting consumers.

Chapter 13 filings, which involve individuals with regular income repaying part of their debts, increased by a solid 16.6 percent. That is in line with other chapter 13 monthly increases this year.

Chapter 11, primarily for business reorganizations, jumped by 49.5 percent. That is the fourth highest chapter 11 monthly increase, but the number of chapter 11s is quite volatile from month to month.

Subchapter V small business filings increased by 34.6 percent. That is the smallest monthly increase this year. This was anticipated due to the factors discussed below.

Update on Chapter 13 and Subchapter V Debt Limits

As reported previously, the higher debt limits for eligibility for chapter 13 and subchapter V expired on June 21st. What has been the impact so far?

The accompanying chart shows that chapter 13 filings continued to rise in July, albeit at a slower pace than we have seen in some recent months. The higher debt limits that expired allowed debtors who carried higher mortgages (up to $2.75 million) to qualify for chapter 13 debt repayment. That primarily benefitted homeowners in states with the highest housing costs. Thus, it is unsurprising that lower limits, while more sharply felt in some jurisdictions, did not dramatically impact total nationwide chapter 13 filings.

The data for subchapter V filings under expedited procedures present a different narrative. More than one-quarter of subchapter V debtors utilized the higher debt limits, explaining the modest increase in filings compared to previous months. A rebound in filings is unlikely unless these limits are reinstated.

Senator Richard Durbin, who chairs the Senate Judiciary Committee and serves as the Senate Majority Whip, submitted an amendment to the National Defense Authorization Act (NDAA) to restore and make retroactive the higher chapter 13 and subchapter V debt limits. Despite the NDAA's 'must pass' status, its enactment may be delayed until Fall or the year's end. Even if the amendment passes, there could be a prolonged wait before higher debt limits are reinstated for individuals and small businesses.

Fed Watching and Other Economic News

On July 31st, the Federal Reserve’s Federal Open Market Committee (FOMC) said it would keep interest rates at the current level “until it has gained greater confidence that inflation is moving sustainably toward 2 percent.” At a news conference held immediately after the FOMC statement was released, Fed Chair Jerome Powell explained that there is also growing confidence that it may be appropriate to cut rates in September. Lower interest rates would ease the burden on highly leveraged companies facing the prospects of bankruptcy reorganization.

Here are some other headlines from July:

• Interest Rates: The Financial Times has run a number of insightful articles, and their headlines tell it all, such as -- “Jay Powell signals growing confidence that US inflation is moving towards 2% target” (7/16/24); and “’Tis the season to be happy (about US inflation)” (7/16/24). In a slightly more critical vein, Bruce Richards on the Markets joins the consensus that a rate cut in September is likely, but then sees a pause. He concludes that a “broken clock is right twice a day so despite the wide miss by economists & Fed watchers over the past two years, it looks like forecasters will finally get it right this time.” (Creditor Corner, 7/19/24).
• Expectations for the Economy: The Wall Street Journal surveyed “business and academic economists” who “remain firmly optimistic about the economic outlook, despite some hints of weakness in recent data” (“Where Do Economists Think We’re Headed? These Are Their Predictions,” 7/18/24). Among the forecasters’ conclusions: the recent slowdown in growth shows “normalizing rather than deteriorating;” the recent rise in unemployment represents a “return to a more stable environment;” and a “higher path for [interest] rates” that may steady at about 3.75 percent by next June, which is a point and a half lower than current rates.
• Stock Market Peaked: Bloomberg reports that “Morgan Stanley’s [Mike] Wilson Says a 10% Stock Market Correction is ‘Highly Likely’” (7/8/24). As the article explains, bearish prognostications have been wrong before, but “uncertainty” over U.S. elections and Federal Reserve policy may make for a “choppy” third quarter.

Conclusion

The significant increase in bankruptcy filings in July supports the trend toward pre-pandemic levels by 2026. All major consumer and business chapters saw substantial jumps in filings in July. However, the rate of increase for subchapter V was the lowest this year, likely due to the more than 50% reduction in debt limits that took effect in late June. Where do overall filings go from here? Hint: look up and not down.