Bankruptcy Filings Skyrocketed in April
Filings Up by 28.5 Percent Over April 2023

In April 2024, total bankruptcy filings surged by 28.5 percent compared to April 2023, marking a significant uptick even after adjusting for two extra weekdays this year, with filings increasing by over 20 percent. This exceeds last year’s increase of 17.6 percent, maintaining a consistent upward trend in 2024.

A Closer Look by Chapter

For the sixteenth consecutive month, the rise in filings was reflected in all major consumer and business chapters of the Bankruptcy Code. 

Pandemic-era cash assistance has been spent, savings are dwindling, and those in financial distress are increasingly turning to chapter 7 relief. More than 60 percent of all bankruptcy debtors file under chapter 7, which allows them to discharge debts by giving up non-exempt property. In April, the number of chapter 7s exploded by 31.5 percent compared to the previous April. This hefty increase reflected the most significant growth in chapter 7 filings in 15 years.

Chapter 13 wage-earner repayment plans went up by 22.5 percent, the steepest rise in chapters 13s in nearly a year. With rules that allow financially pressed individuals to keep their car, home, and other secured property, chapter 13 provides an important alternative to losing equity or refinancing at current high interest rates. Absent Congressional action, chapter 13 debt limits will be lowered in June. That could incentivize some debtors to file now rather than to wait until later when they may not qualify under chapter 13.

Chapter 11 cases – usually used by businesses seeking to reorganize -- continued their precipitous climb upward. With a 48.4 percent increase in April filings over the same month last year, chapter 11 filings are well on pace to reach pre-pandemic levels this year.

Within chapter 11, the number of small business cases filed under subchapter V precipitously rose by another 64.1 percent. Although subchapter V filings have hugely increased over the past year, some speculate that the rate of increase may go even higher because the debt eligibility limits are scheduled to drop from $7.5 million to about $3 million in June unless Congress passes legislation to extend the higher limits.

Other Economic News of Interest

On May 2nd, the Federal Open Market Committee left interest rates unchanged. The Federal Reserve issued a statement explaining the decision, including by saying that the “economic outlook is uncertain” and that it “does not expect it will be appropriate to reduce the target range [of interest rates] until it has gained greater confidence that inflation is moving sustainably toward 2 percent.”

Most of the economic news in April was mixed too pessimistic. Here are a few headlines that capture the sentiment:

• “U.S. Economic Growth Slows to 1.6 %” (Washington Post, April 25, 2024): The biggest news came at the end of the month when gross domestic product (GDP) growth numbers came in at a slower-paced 1.6 percent. According to the Commerce Department, lower spending on consumer goods, such as automobiles, was the main reason. But that news story was followed a few days later by another Commerce Department release showing other signs of stronger consumer spending in the face of inflation that remained above expectations.
• “The Dream of Fed Rate Cuts Is Slipping Away” (Wall Street Journal, April 25, 2024): According to Chicago Federal Reserve Bank president Austan Goolsbee, “we have to recalibrate” the odds of a rate cut because of inflation staying persistently above the Fed’s two percent goal. The article goes behind the 1.6 percent growth number to say that underlying consumer demand remains high.
• Bruce Richards on the Market (courtesy of the weekly Creditor Rights Coalition on-line newsletter) delved into the cost-of-living data to report that from January 2021 to April 2024, “a bag of food at your local grocery store” rose by 25 percent and the cost to “fill up your car with gas” rose by about 50 percent. And the cost of home ownership has exploded since early 2020, rising by 123 percent overall, with taxes and insurance up by 43 percent and utilities up by nearly 30 percent.
• “The Second Powell Pivot” (The Economist, April 20, 2024): According to this article, Fed Chairman Jerome Powell “has conducted a pivot upon a pivot” in predicting interest rate cuts. The story goes on to make interesting observations about the impact on businesses. For example, pandemic-era borrowing at rock-bottom interest rates helped businesses “cope with higher rates so far,” but “eventually they will have to refinance and pay up.” Also, banks have $478 billion of unrealized losses, “much of which result from higher rates reducing the value of government and mortgage-backed bonds.”
• “U.S. consumers on lower incomes face loan stress while banks pull back” (Reuters, April 22, 2024): At the last AIS webinar, we reported in rising consumer delinquencies. Reuters quoted Fed Bank president Goolsbee as saying, “that is often a leading indicator things are about to get worse.” The Consumer Bankers Association says that “banks are trying to come up with early-warning signals for customers about their bill payments.” Also, the Federal Reserve Bank of Dallas polled local lenders and found that “loan volumes declined, and credit standards tightened further as banks raised borrowing costs in March.”
• “Student Debt Plan Would Add Hundreds of Billions to Deficit” (Committee for a Responsible Federal Budget, April 16, 2016): Finally, the Biden Administration continues to try to address the student loan burden despite setbacks in the courts. According to the non-partisan but deficit hawkish Committee for a Responsible Federal Budget, the latest attempt to cancel up to $20,000 in debts, combined with authority to eliminate student debt for those facing “hardship,” could end up costing $250 billion to $750 billion. Our commentary: That may reduce the need for student loan borrower bankruptcies but have broader and less favorable economic impacts.

Whither Subchapter V?

If you watched the AIS webinar a couple of weeks ago, you heard more about the expiration in June of the higher debt limit eligibility thresholds for chapter 13 and subchapter V cases. Here are two important updates: Senate Judiciary Chairman Dick Durbin introduced a bipartisan bill (S. 4150) to extend the higher limits for two more years, and the American Bankruptcy Institute (ABI) issued its long-anticipated Task Force report on subchapter V. The Task Force made narrow recommendations on statutory, rule, and practice changes to improve the system. The ABI also endorsed a debt limit increase.

For more information on the latest developments in subchapter V, read our detailed news alert.

Conclusion

Bankruptcy filings continue on a steep upward trajectory.  With few signs that the brakes will be applied anytime soon, the fast-accelerating filing numbers may match last year’s pace, so we will be back to pre-pandemic levels by 2026.  A lot can happen between now and then, but for now, there are a lot of green lights and high-speed limits along the bankruptcy filing highway.