Bankruptcy Filings Pick Up Steam and Climb by 13.32 Percent

Total filings climbed by 13.32 percent in January 2025 compared to the previous January. With 41,501 new bankruptcy petitions filed to start the new year, the monthly percentage was the largest since October 2024. Although that rate of increase was slightly below the annual rate for last year, the January rise continued an accelerating upward trend seen over the past three months. The increases are consistent with rising consumer credit delinquencies, which AIS has previously reported. With lots of national economic policy changes in the offing, there could be some surprises down the road. But, for now, the data points strongly to steady bankruptcy filing increases in the future.

A Closer Look by Chapter

The relative filings by chapter stuck to recent trend lines:

Chapter 7 liquidation filings rose by 15.31 percent and once again outpaced the rise in wage-earner plans filed under chapter 13. The number of new chapter 7 cases was in line with the double-digit percentage increases that have persisted for more than a year. Chapter 7 cases represent the overwhelming bulk of all bankruptcy filings.

Chapter 13 income repayment cases went up by 10.12 percent, which is quite a bit higher than shown in recent monthly reports. Although causes are speculative, perhaps stubborn interest rates may have arrested the slowdown in the pace of new chapter 13 filings.

Chapter 11 cases, generally business reorganizations, jumped by 30.72 percent in January. Chapter 11 filings have been rising significantly and the total number of such filings last year was the highest in twelve years. Clearly, many businesses are feeling economic strains.

In contrast, subchapter V small business cases actually fell by 2.42 percent in January. This is the second consecutive month showing a decrease consistent with the slowing rate of subchapter V filings since debt eligibility limits were drastically decreased at the end of last June.

IMPORTANT NEWS ALERT:

To the surprise of few pundits in the Nation’s Capital, Rohit Chopra, the highly controversial and aggressive Director of the Consumer Financial Protection Bureau (CFPB), was fired by President Trump last weekend. Right up until his firing, Chopra made clear he would energetically carry out his sometimes controversial regulatory and enforcement agenda until made to stop.

On Monday, February 3^rd, President Trump named Treasury Secretary Scott Bessent as Acting CFPB Director. Absent other action by the President, the Deputy Director would have become the acting head of the CFPB. Acting Director Bessent immediately imposed a freeze on agency litigation and enforcement activities. He also directed the staff to suspend recent rules which have not yet taken effect. As of this writing, the President has not yet nominated a permanent Director. The nomination requires the advice and consent of the Senate. This is a developing story worth watching.

Other Tidbits

• Interest Rates: Interest rate news is always BIG bankruptcy news. At a news conference on January 29th, Fed Chairman Jerome Powell announced that the Fed was pausing interest rate cuts. He also said there would be “no hurry” to change policy at the next meeting in March. Just as interest rate hikes that began a couple of years ago were linked with higher bankruptcy filings, lower interest rates were expected to ease pressures for more bankruptcies, especially for financially stretched corporations. With the pause, it does not appear that Fed actions will affect the current upward trajectory in bankruptcy filings.
• Just How Independent is the Federal Reserve? CreditInsights (a Fitch Solutions Company; courtesy of Creditor Rights Coalition) produced an interesting report last month on “Fed Independence: What You Need to Know.” The question was perhaps made more intriguing when Chairman Powell adamantly declined to say whether Presidential Executive Orders were binding on the Fed at the January news conference. If the traditional tussle between the Fed and Administration over inflation, unemployment, and interest rates gets hotter under the Trump Administration, then tests of both comity and Presidential authority to remove Fed officials may grow more intense and have a real impact on the economy.
• Subchapter V Workarounds: Bloomberg ran a story about debtor strategies to get around the lower debt eligibility limits for subchapter V small businesses. The strategies generally have to do with classifying debts. Under the law, only certain kinds of debts count against the debt limit. One law firm said that owners might take out personal loans to pay down some business debt because debt owed to insiders is not counted. Others might try to classify debts as contingent because only liquidated debts will be counted. If a creditor disputes the classification, then the bankruptcy court will decide. If Congress does not raise the limits, such efforts may expand in the future. (“Small Businesses Find Workaround Amid Bankruptcy Debt Limit Drop,” Bloomberg Law (via ABI), 1/13/25.)
• Bankruptcy Filings Dwarf the Rest of the Federal Civil Docket: In his “2024 Year End Report on the Federal Judiciary,” Chief Justice John Roberts provided a statistical break-down of the federal court system. For example, the federal district courts docketed 290,896 civil cases in FY 2024, whereas bankruptcy cases totaled 504,112. Bankruptcy cases have long accounted for the largest caseload in the federal court system. This is just another reminder of the importance of an efficient and effective bankruptcy system to the overall American economy.

Conclusion

Bankruptcy filings continued their steep upward trajectory in January. The increase in chapter 11 cases remains very large and may be somewhat alarming. The decrease in subchapter Vs seems to be the natural consequence of the more stringent eligibility requirements. Consumer credit delinquencies may be expected to continue to fuel future bankruptcy filing increases, but over time, the numbers could be affected by the many macro-economic policy changes that may come out of Washington, D.C., over the next several months.