No Surprises: Bankruptcy Filings Continue to Gain Steam

If banks and businesses hate surprises, February bankruptcy filing numbers may be welcome. The upward trend in filings continued. Not only that, but the pace of increase accelerated.

A comparison of overall filing numbers for February 2024 compared to the same month last year shows an increase of about 22.3 percent. That outpaces the annual increase last year of 17.6 percent. This is a Leap Year, so February includes one more day of filings, but that does not appreciably change the picture. Of note, the 3,755 daily filing total on February 29th represented the highest daily filing total since August 2020.

The most significant number of filings occurred in chapter 7 liquidations. In February, chapter 7 filings rose by 23.2 percent over the same month in 2023. Until mid-last year, chapter 7s were increasing, but at a less robust pace than chapter 13 repayment plan cases. Most consumer debtors file under chapter 7 because they get a discharge of their debts quicker and without making any repayment.

Chapter 13 filings were outpaced by chapter 7s, but they still rose by a very robust 17.9 percent. That compares to a much smaller increase in January. Consumers often file under chapter 13 because they usually get to keep their house or car, which may be sold in chapter 7.

Chapter 11 filings more than doubled in February 2024 compared to last February. The increase was an eye-popping 133.1 percent. Monthly variations in chapter 11 filings, usually business reorganizations, can vary widely from month to month. Nonetheless, it is remarkable that we have seen triple-digit increases several times over the past year. Even though big cases filed with multiple affiliated companies account for a material part of the increase, the rapid rise in the number of chapter 11 cases has been persistent over many months and the rate is jarring.

Within chapter 11, the number of small businesses filing under subchapter V jumped by a spectacular 75.4 percent above last year.

Adding all chapters together, the 22.3 percent jump means the filing rates are getting closer to the pre-pandemic norms. Although filings remain more than one-third below the pre-pandemic rates, they are catching up fast. Last year at this time, bankruptcy filings lagged pre-pandemic levels by about 45.9 percent.

AIS Insight_Feb2024_Table_5

After being thwarted by the courts in its most ambitious efforts to cancel student loans, the Biden Administration took two more steps in February to reduce the burden of student loans.

First, the U.S. Department of Education unveiled a rulemaking that will be open for public comment in May. The plan is for the Education Department to waive collection on federal student loans taken out by borrowers who would suffer "hardship” if forced to repay. Depending on court challenges and how the 17 factors for determining hardship are applied, potentially millions of borrowers may be affected.

Second, the Administration commenced cancellation of $1.2 billion in student loans to 153,000 borrowers who have been repaying student loans for ten years and meet other requirements.

These are two of the multiple efforts made by the Biden Administration to wipe out student loan debt. A year-old plan to soften the government’s traditionally severe litigation position to deny discharge of student debt has been slow to bear results. Changing collections policy in bankruptcy court could invite a lot more bankruptcy filings. In contrast, the new initiatives to outright eliminate student loan debt would have the opposite effect.

Here are some updates on economic factors that may influence bankruptcy filings:

Commercial Real Estate in Trouble: The bust in office building values and rise in vacancies is becoming more apparent. Although not nearly as ominous as the mortgage meltdown, which precipitated the Great Recession of 2009, increased attention is being paid to that $20 trillion market. Bloomberg (2/14/24) quoted Treasury Secretary Yellen saying the situation remains "manageable,” but other experts expect more troublesome consequences.
Consumer Debt and Delinquencies Headed Higher: Both consumer debt, which recently hit an all-time high, and the national debt, which seems to break new records every second of the day, may pose increasing difficulties. In February, the Federal Reserve Bank of New York released data showing household debt continuing to climb in the fourth quarter of 2023. Delinquencies rose in most categories. Previous reports showed that subprime borrowers were leading the alarming trend.
Consumer Lending Down: As consumers face more difficulty in repaying, Bankregdata.com (2/7/24) analyzed recent data to conclude that credit scores were inflated because of the financial good times made possible for government pandemic assistance. In turn, those inflated credit scores led to excessive lending that is resulting in higher delinquencies. As a result, consumer lending began to decrease. Some commentators, however, think that the contraction in lending may be over. (AP News, 2/29/24, via ABI)

Bankruptcies are up at a steady clip, exceeding the rate of increase last year. Although the economy may have a "soft landing” from the pandemic, there are warning signs that may direct bankruptcy filing rates higher for quite a bit longer. So, what’s the good news? There were no big surprises in February.

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