Bankruptcy Filings Continue Upward Spiral
May Filings Rise by 16.3 Percent Over Last Year

Bankruptcy filings continued the upward spiral that begun last year, with 16.28 percent more filings in May compared to the same month in 2023. Comparing filings to the same month in the previous year provides the best gauge of trends because it factors out seasonal differences. With nearly 45,000 bankruptcy petitions filed, the May increase just about matches the 17.6 percent increase last year. For the first half of 2024, total bankruptcy filings are up by 17.29 percent. These numbers mean that bankruptcies remain on a trend to reach pre-pandemic levels after next year.

A Closer Look by Chapter

The growth in filings was remarkably similar in all the major chapters of the Bankruptcy Code.

Chapter 7 liquidation filings continued to lead the pack, with well over 60 percent of new petitions filed by consumers and businesses giving up any non-exempt assets. The increase in chapter 7 filings slightly outpaced the other major chapters, with 17.4 percent more filings in May.

Chapter 13 wage-earner repayment plan cases rose by a robust 14.65 percent in May compared to the same month last year. Chapter 13’s growth, which began exploding in 2022, began to moderate, but has recently picked up steam once again.

Chapter 11 cases, generally involving companies seeking to reorganize, increased by 17.0 percent. Interestingly, though, the increase from last year is largely due to more than 160 cases filed under the Steward Health umbrella, the healthcare giant of hospitals, physician practices, and other entities that filed for chapter 11 relief on May 6th. Large cases often involve filings by many affiliates and that sometimes provides misleading data on the magnitude of increase.

Of some significance is the 48.7 percent increase in small business filings under subchapter V of chapter 11. Although the number of subchapter Vs has risen substantially for many months, the large magnitude of increase may confirm the speculation of some commentators that uncertain Congressional prospects for extending the current $7.5 million debt limit may have caused a rush in filings. If Congress does not act by June 21st, then the debt limit will fall by almost two-thirds. Between one-quarter and one-third of subchapter V filers would be ineligible for the expedited small business treatment after the deadline. Those debtors then would have to choose more cumbersome chapter 11 processes or try to put off filing altogether. The latter strategy may work for a while but may not be a permanent solution for many filers.

Round-Up of Economic News

The financial press continues to paint a mixed picture of economic prospects of consumers, lenders, and future bankruptcy filing rates.

• Charge-Offs on the Rise: JP Morgan Chase reported a healthy consumer lending business despite increasing stress for lower-income borrowers. Credit card charge-offs are expected to rise from 3.4 percent to 3.6 percent next year, and automobile loan charge-offs are expected to be 0.65 percent, which is almost double the pre-pandemic rate in 2019. The bank is “closely monitoring consumers whose incomes have not kept pace with inflation” and expects a “very healthy return” in its consumer and community banking business. (“JP Morgan’s Consumer Business Is Doing Great. Its Customers Are Just Okay,” WSJ, 5/21/24)
• Chapter 11 Secured Creditor Recoveries Are Down: Due to a variety of changes in the corporate distressed lending environment, senior lenders are often recovering less than in past years. Among the factors are shrinking debt cushions resulting from previous low-interest loans and aggressive tactics by competitor distressed lenders who provide new financing that cuts out formerly senior debt. (“Top-Ranking Lenders See Diminishing Recoveries in Bankruptcy,” WSJ, 5/20/24)

Round-Up of Recent Supreme Court Decisions

The Supreme Court has heard several cases this term that are of importance to bankruptcy stakeholders. Three important bankruptcy cases have yet to be decided. But one very important non-bankruptcy decision was handed down in May.

By a 7-2 majority in Community Financial Protection Bureau, et al. v. Community Financial Services Association, et al., no. 22-448, the Court upheld the CFPB’s funding mechanism. Challengers argued that it violated the Appropriations Clause of the Constitution because the Director of the CFPB sets the agency’s budget up to a cap without Congressional review. Nearly all other federal agencies rely on an annual appropriation from Congress.

If payday lenders and other business groups who contested the CFPB had prevailed, then a host of CFPB regulations and enforcement actions may have been set aside. The Supreme Court decision breaks a logjam that was holding up lower court decisions on the validity of more than a dozen rules and enforcement actions.

Reaction to the opinion was swift, with an emboldened CFPB issuing a statement saying that “[f]or years, lawbreaking companies and Wall Street lobbyists have been scheming to defund essential consumer protection enforcement. . . . Today’s decision is a resounding victory for American families and honest businesses alike, ensuring that consumers are protected for predatory corporations and that markets are fair, transparent, and competitive.”

According to Politico, U.S. Senator Elizabeth Warren, who was an author of the law establishing the CFPB before she was elected to the Senate, summed up her reaction at a press conference with a single word: “Woohoo.”

On the other hand, the Chairman of the House Financial Services Committee, Patrick McHenry, said he would fight for legislation that would subject the CFPB to the Congressional appropriations process.

Meanwhile, the CFPB continues to make headlines with significant enforcement actions, including recently suing the Pennsylvania Higher Education Assistance Authority for, among other things, trying to collect on debts discharged in bankruptcy.

For a fuller description of the Supreme Court opinion, see AIS’s News Alert here.

The Court still has more than 30 decisions to hand down before its terms expire by the end of June or very early July. We will provide news alerts as the cases are decided and another Supreme Court round-up in next month’s blog.

Conclusion

The number of bankruptcy filings continues to match last year’s pace. This is leading us closer and closer to pre-pandemic levels. The CFPB may be emboldened in its enforcement efforts after a big win in the Supreme Court. National economic news remains mixed. All the ingredients seem to be in place for lenders to experience more customer bankruptcies and greater scrutiny of their bankruptcy practices. Well, at least none of this should come as a big surprise to those who have been paying attention to the lender landscape over the past couple of years.