The upward drift of bankruptcy filings seen in the last half of 2022 was turbo-charged in the first month of this year. After increasing by five percent during the last two quarters of 2022, bankruptcy filings increased by 18.9 percent last month compared to the previous January, for a total of 31,285 new filings. This was the most significant increase since March 2010. As our December report and Webinar suggested two weeks ago, big increases in filing numbers may be in store for this year. 1
Drilling down just a bit chapter by chapter may provide more clues on what to expect.2
Chapter 13
Chapter 13 filings maintained their torrid pace and climbed by 33.5 percent over last January. During the fourth quarter of last year, the chapter 13 filing increase slightly cooled to a still red-hot 27 percent. This means the upward trajectory is getting even steeper. Chapter 13 filings continue to far outpace chapter 7s.
Chapter 7
The key to filing rates this year may lie with chapter 7s filings. They stopped their steep decline last summer. Insofar as chapter 7s constitute a majority of all bankruptcy filings, any upward turn in total filings will also require chapter 7s to increase. That is precisely what happened last month.
Chapter 11
Chapter 11s were on a roller-coaster last year but showed signs of moving upward. As noted in previous AIS analyses of filings, chapter 11s can be erratic because the total number of cases is a small proportion of all bankruptcies and changes in a single industry can make a difference. In January, chapter 11 filings rose by an extraordinary 65.2 percent. With big retailers speculated to file soon, chapter 11 filings may be higher than normal again next month because retail companies are often organized in a way that causes multiple affiliates to file as separate cases.
Subchapter V small business cases robustly rose by 33.4 percent compared to last January. Subchapter Vs were fairly steady last year, so this major increase may be a blip on the screen or, maybe more likely, augur a more sustained increase. But the numbers are small (130 subchapter Vs last month), so monthly variations are to be expected.
What Might Be the Reasons for the Major Increase?
Consumers do not appear to be faring all that well these days. They are cash-strapped, facing higher prices, and paying more to borrow money. The Wall Street Journal posted a graph on January 30th that showed how personal savings rates peaked when COVID cash assistance was disbursed but plummeted as the government money ran out. The personal savings rate is dwindling fast. Personal savings out topped out at 33.8 percent of income in April 2020 and now stands a tad above 3 percent.
With the exception of the recent jobs report, it is not easy to find rosy economic news. Inflation is moderating but remains high. Much of the rest of the economic news is negative, and most economists expect it to stay that way for a while longer. Most data suggest consumer distress, as shown by higher amounts of credit card debt, growing delinquencies (e.g., a large auto lender reported that the number of loans more than 60 days overdue almost doubled in the fourth quarter), and continued upward ticks in interest rates.
On the business front, the Creditor Rights Coalition cited an expert prediction that retail bankruptcies will increase because inflation is hurting consumers, retailers are overextended on inventory, and capital markets have tightened.
Conclusion
Bankruptcies are way up to the start of the year. Although we may see some blips, there are a few reasons to expect a return to historically low filing numbers. It has been more than a decade since overall bankruptcy filings increased so briskly. AIS will continue to monitor and report filing rate trends and the impacts that they may have on consumers, creditors, and the bankruptcy system.
1 The 18.9 percent increase is far above the 10 percent annual growth that AIS suggested at the Webinar.
2 The most probative comparison is to the same month of the previous year because bankruptcy filings, generally and for a variety of reasons, follow a cyclical pattern with some months more popular for filing than other months. That renders previous month comparisons less useful.
Commentary provided by Clifford J. White, Senior Advisor - Bankruptcy Compliance for AIS.