December Filings Bring No Surprises

Calendar Year 2022 was filled with lots of economic and other surprises. Unfortunately, few of them were good. So perhaps it should come as a relief that the December bankruptcy filing data contained No Surprises.

As anticipated, if not outright predicted, December 2022 filings exceeded last year’s December filings by nearly six percent. That was the fifth consecutive month of an increase over the previous year.

With the traditional end-of-year slowdown in bankruptcies, December filings were five percent lower than the previous month. We can expect that same slowdown to continue in January until the holiday credit card bills come due, along with post-New Year’s Day foreclosures and repossessions.

If traditional patterns hold, then January filings will show a similar uptick from the previous January, and we may begin to see a healthy climb in filings as 2023 rolls from winter into spring.

Chapter-by-Chapter Trends

Chapter-by-chapter trends contained no surprises either. The number of chapter 13s climbed by a hefty 26 percent over December 2021; chapter 7s decreased by a modest six percent; chapter 11s were pretty even with a one percent rise; and subchapter V small business cases were up by a healthy 13 percent.

We will cover these trends and more during our 2023 Bankruptcy Outlook Webinar on January 25th.

Annual Filings

Full-year filing numbers are misleading because trends changed mid-year. For the entire calendar year 2022, total bankruptcy filings fell by 5.8%, down to 378,297. Of that total, chapter 13s increased by an extraordinary 34.1%; chapter 7 decreased by 20%, and chapter 11s registered a 4.01% uptick.

Of greater significance, overall filings increased by nearly five percent over the past six months compared to the last half of 2021. In the third quarter of 2022 (July to September), the number of filings increased by 4 percent over the same quarter during the previous year. Quarter 4 filings rose by 5 percent.

Predictions Anyone?

Pandemic-era filing trends came as a surprise to most bankruptcy mavens. That has made many experts slow to predict future trends. In a departure from that prevailing caution, here is some speculation on what to expect during the coming year:

• Overall filings will increase by 10 percent this year. With economic conditions at best middling and at worst foreboding a significant recession – not to mention with little new economic assistance in the political cards and possibly more student loan borrowers seeking bankruptcy relief (see previous blogs for a discussion of changes in the Department of Justice legal position on dischargeability of student loan debt) -- bankruptcy filings are primed to rise by a tad more than double the rate of the past six months. However, that would still be about 45 percent less than the "normal” pre-pandemic level.
• The number of filings under each chapter will rise. At the risk of climbing out even farther on the proverbial prognostication limb, here's to predicting that chapter 7 filings will reverse their downward trend and rise by 5 percent. Distressed borrowers can hold out for just so long. Chapter 13s will rise by the same 27 percent that they rose in the past quarter of CY 2022, but behind the torrid 46 percent pace of the quarter before that.
• Chapter 11s will rise the most among all chapters, perhaps by 25 to 50 percent over last year. Suppose interest rates are as key to business filing patterns as the Wall Street bankruptcy experts have told us for the past decade (we can name names). In that case, the DOUBLING of the prime interest rate over the past year, along with the Fed Chair’s promise for more increases to begin the new year, suggests a lot more filings throughout 2023.
• Small business subchapter V cases will increase by the same 14 percent as they did in 2022. This is because the upward trajectory in subchapter Vs was relatively steady last year, and they are not subject to same kind of industry-specific collapse (think cryptocurrency) that brings a wave of new cases crashing against the business reorganization shores.

If these predictions bear out, remember you heard it here first. On the other hand, if they do not, then all of us will be happy because it will mean that consumers and businesses did better than we expected.

Happy New Year to us all!

Commentary provided by Clifford J. White, Senior Advisor - Bankruptcy Compliance for AIS.