Overall bankruptcy filings continued to rise in August compared to the same month last year but at a slower-than-usual pace of 8.47 percent. Despite the more modest August numbers, the year-to-date increase is a much higher 15.56 percent. This is the third time this year when the monthly increase did not rise by double-digits over the same month in 2023. The previous single-digit monthly increases (March and June) were each followed by an eye-popping increase of more than 20 percent.
A Closer Look by Chapter
The August filing increases were relatively modest for all major chapters of the Bankruptcy Code, with chapter 11s showing the greatest slow-down compared to earlier months of this year. But all chapters continued to register a rise.
Chapter 7 filings rose by 10.04 percent. Debtors in chapter 7 are mainly consumers who lose their non-exempt property. They tend to be the debtors with the fewest available options facing the most severe financial distress.
Chapter 13 filings went up by 6.19 percent. Chapter 13 debtors, who must be employed, often are able to keep their cars and homes through a repayment plan. Together with chapter 7, these two chapters account for almost all consumer filings. Even with a lower-than-average rise last month, sustained and material increases over the past two years demonstrate that many consumers struggled since the pandemic’s end.
Chapter 11 filings were the biggest surprise, with an increase over last August of only 4.24 percent. This compares with previous increases this year that twice exceeded 50 percent and once exploded by more than 100 percent. Lower numbers due to summer vacations and other seasonal variations are controlled by our method of calculating increases by reference to the same month of the previous year. That makes the starkly slower growth in chapter 11s (about 1/12th the rate of increase we saw last month) all the more difficult to explain. In part, some businesses may be trying to hang on until interest rates drop. (See discussion below.) More than anything, the August data may reflect a large drop in small business filings and a pause in larger case filings as well.
Finally, chapter 11’s subchapter V small business filings rose modestly, with an increase of 5.20 percent. This is by far the smallest increase we have seen in subchapter Vs this year. This deceleration is probably explained by the change in the statutory debt limits, which fell in June from $7.5 million to about $3 million. Not only did that disqualify more than one-quarter of all debtors who previously were eligible, but it also caused a surge in filings earlier this summer to beat the debt limit decrease.
Bankruptcy Updates
Congress has been out for most of the summer, and there has been less news than usual, but some updates could affect future bankruptcy filing trends.
Fed Watching Intensifies: After the Fed held rates steady at its July 31st meeting, a lot has happened. The stock market alarmingly fell and then rose to an all-time high, inflation moderated, and employment cooled. That leads most observers to expect a quarter-point reduction in interest rates when the Federal Open Market Committee meets on September 17 and 18.
Federal Reserve Chairman Jerome Powell turbo-charged expectations with his annual address in late August at a Fed gathering in Jackson Hole, Wyoming. Among many noteworthy comments, Chairman Powell said that his “confidence has grown that inflation is on a sustainable path back to 2 percent” so that “[t]he time has come for policy to adjust.”
These statements sparked speculation that the September rate cut might be as high as one-half point, with more cuts coming after that. When the Fed embarked on a path of rate hikes about two years ago, it took only a few months before chapter 11 bankruptcy filings began a steep rise. We will watch to see if corporate filings react as quickly to rate reductions.
Consumer Credit Continues to Show Warning Signs: Second quarter (Q2) data from the St. Louis Federal Reserve shows that credit card delinquencies continue to rise, reaching 3.25 percent. This compares to 1.57 percent in the pandemic-era of Q4 in 2021. This is the highest delinquency rate in 13 years (Q2 of 2011). Also, the Federal Reserve of New York reported on its June 2024 survey of credit applications. Unsurprisingly, with delinquencies up, the application rate was down and the rejection rate was up from February compared to June. Rejections rose from 18.7 to 21.4 percent.
What’s Going to Happen in 2025? The Wall Street Journal (8/29/31) has identified five simmering bankruptcy issues that Congress might take up next year. They are: (1) resurrecting involuntary third-party releases of liability in favor of non-debtor entities, which were struck down by the Supreme Court in the Purdue Pharma case; (2) prohibiting the “Texas Two-Step” through which Johnson & Johnson and other companies have attempted to place lawsuit liability in spin-off companies that can file bankruptcy without endangering the solvent parent company; (3) imposing stricter controls on venue and judge-shopping to prevent corporate debtor law firms from selecting debtor-friendly courts that are remote from the location of the company, its assets, and its operations; (4) raising the debt threshold to allow more small businesses to file under expedited subchapter V bankruptcy procedures; and (5) changing the law to make it easier to discharge student loan debt.
Whatever Happened to Student Loan Discharges in Bankruptcy? The Biden Administration has taken many steps to promote student loan cancellation, both in and outside bankruptcy. The latest plan, known as SAVE, was dealt another blow last month. The Supreme Court kept in place a court of appeals stay on implementing regulations until the lower Court could rule on the merits of multiple state challenges to the Administration’s authority. The last time the Supreme Court reviewed a student loan cancellation plan, the high Court found in Biden v. Nebraska that the Department of Education exceeded its statutory discretion.
The American Bankruptcy Institute recently reported on a Justice Department (DOJ) survey on the number of debtors requesting student loan bankruptcy discharges under the Administration’s relaxed guidelines that were issued in November 2022. The data shows a slow but steady increase with 1,220 cases filed through March 2024. In 98 percent of the cases in which the debtor said that repayment would cause an “undue hardship,” bankruptcy courts granted full or partial discharges. Most students still do not seek student loan bankruptcy relief, perhaps because either they do not meet the more lenient “undue hardship” standard or they cannot afford the costs of the additional litigation. [ABI Journal, Aug. 2024.]
Conclusion
August bankruptcy filings continued the two-year trend of significant increases compared to the same month in the previous year. But the rate of increase decelerated last month. In recent experience, a one-month slow-down in growth has been followed by a very high double-digit increase the following month. We will soon see if that pattern repeats itself. Subchapter V small business filings may be another story. The modest growth in subchapter V filings is likely due to the major lowering of debt filing limits. We will keep track of any changes in bankruptcy trends and report to you again next month.