October Bankruptcy Filings Climb Steeply by 15.85 Percent;
But Chapter 11s Fall Slightly

Total bankruptcy filings steeply climbed by 15.85 percent in October compared to the same month last year. This is close to the average year-over-year monthly increase in 2024 and suggests that bankruptcies will continue to rise in the future. Chapter 11 reorganizations actually fell for the first time in nearly two years, but are still likely to reach an annual filing level not seen since well before the pandemic. Overall, 47,121 individuals and businesses sought bankruptcy protection last month.

A Closer Look by Chapter

Chapter 7 liquidation cases rose by a whopping 20.71 percent last month. This chapter is used mainly by individual consumers without significant assets who seek a fresh start. When COVID cash assistance programs dried up, these consumers filed for bankruptcy in rapidly increasing numbers. The October filing volume gives little reason to suspect that the number of consumers facing dire financial straits will be lessening anytime soon.

Chapter 13 cases, filed mainly by consumers who are in arrears with their home or automobile payments, rose less dramatically by 9.3 percent. These consumer filers are allowed to retain their property if they can keep up monthly payments and cure arrearages. It will be interesting to see if some of them will take advantage of elevated home prices and lower interest rates to refinance as an alternative to bankruptcy. The October increase was the highest year-over-year rise in three months.

Chapter 11 filings fell by 4.09 percent and created some question marks. This chapter is used most often by businesses seeking to sell as a going-concern or reorganize. Chapter 11 filings have been on a torrid pace that sometimes fluctuates greatly from month-to-month. These cases tend to be sensitive to interest rates so the recent Fed rate cut may already be influencing businesses to hold out for affordable refinancing instead of bankruptcy. That is impossible to know at this point. Nonetheless, the number of chapter 11 filings has already reached about 7,000 for the year and are likely to reach an annual rate not seen since before the pandemic.

Subchapter V filings rose 13.29 percent, which was far lower than the long-term pace that abruptly slowed after the debt limits were reduced from $7.5 million to less than $3 million in June. The filing numbers show that many small businesses still seek the more efficient subchapter V process, which is tailored for smaller enterprises with uncomplicated finances. But the growth in subchapter V filings fell to a fraction of what it was before the eligibility limits changed,

Elections Have Consequences

As this is being written, the Presidential election is still a few days away. Regardless of the outcome, the election will bring change and have profound consequences for national economic and regulatory policies and priorities, including those affecting lenders in the bankruptcy space. Beyond setting a new agenda, the next President will have to staff a new Administration with about 4,000 political appointees. Although a lot of those positions include part-time or unpaid positions on various advisory bodies, the implementation and advocacy of the President’s policies will be driven by senior and support staff ranging from Cabinet members to clerks. In addition, the new Administration will have authority to reassign thousands of career civil servants who are also key to the successful implementation of Administration priorities.

For consumer lenders, there are at least five key enforcement and regulatory bodies whose leadership changes will affect financial institution risks and practices:

• Federal Reserve: Jerome Powell is the Chair of the Federal Reserve System. Among the Fed’s multi-faceted responsibilities are setting interest rates and supervising certain large financial institutions. Mr. Powell is serving a four-year term as Chair which expires in early 2026. There is some rumbling that former President Trump may fire Powell, but the President’s authority to remove the Fed Chair for policy reasons is unsettled. After having served two terms as Chair, it may well be that the President of either party may wish to nominate and confirm a successor within the next 18 months.
• Office of the Comptroller of the Currency: The OCC, which is located within the Department of Treasury, supervises national banks and federal savings associations. During almost all of the Biden Administration, there has been an Acting Comptroller. The new President, whether that be a Republican or Democrat, will presumably want to appoint, subject to Senate confirmation, a new Comptroller who would serve a five-year term. The new Comptroller will have a major impact on financial institutions.
• Consumer Financial Protection Board: This relatively young agency created during the Obama Administration has broad powers to regulate banks and other financial entities. Unlike the mandate of the Fed and OCC, the CFPB is focused solely on consumer protection instead of the broader “safety and soundness” of banks and businesses it regulates. The Supreme Court ruled that the Director of the CFPB serves as the pleasure of the President and may be removed at any time. The Director is subject to Senate confirmation. The CFPB under current head Rohit Chopra has been extremely aggressive in its enforcement and regulatory actions. It is a safe bet that a Republican President would fire Director Chopra very early in the Administration and appoint his own Director. If the Democratic candidate wins, Director Chopra may decide to resign after a grueling three years at the helm, but he would also be quite compatible with a Harris Administration.
• Federal Trade Commission: The FTC has responsibility for antitrust and consumer protection. Most of its regulatory and enforcement actions are centered on private business practices. It often cooperates with other agencies in sharing certain information and identifying fraudulent practices that may occur in and outside of bankruptcy. The FTC is a five-member Commission of political appointees, with a maximum of three who are members of the President’s own political party. Current Chair Lina Khan, who is serving on an expired term, has been very aggressive in wielding the agency’s authority. Surprising to some, she has been praised by Senator (and Vice Presidential candidate) Vance and “populist” Republicans. Although it would seem likely that a Democratic President would retain Ms. Khan as Chair, there are news reports of rumbling by more pro-business Democrats to make a change. It is highly likely that a Republican would install his own Chair and nominate a successor to Ms. Khan as Commissioner. Even though the President is free to designate any Commissioner as Chair, the controlling statute provides that Commissioners may be removed only “for cause.” Many legal observers expect this restriction on the President’s removal authority to be contested in the Supreme Court.
• United States Trustee Program: This unit is housed within the Department of Justice. During its roughly 40-year history, the USTP has been led by a Director who can be either political or career. The Director position was encumbered by three consecutive political appointees until this blog’s author served for 17 years under both Republican and Democratic Administrations. The current Director, Tara Twomey, has been in office for less than two years. The USTP’s authority is confined to bankruptcy, but the agency has a long history of cooperating with other regulatory and enforcement bodies which oversee banks and other private entities operate both inside and outside the bankruptcy system. The USTP has administrative, regulatory, and enforcement authority over both corporate reorganizations and consumer bankruptcy cases. It was a driving force in past federal efforts to crack down on non-compliant debtors, lenders, and professionals. The USTP also spearheaded litigation that led to recent Supreme Court decisions. It has been more than four years since it launched a new consumer enforcement initiative so it would not be surprising to see reinvigorated compliance efforts, including new initiatives and more intense random reviews to ensure that patterns of past violations have not reappeared.

With every change of Administration, even when the same party remains in power, a game of musical chairs ensues. It should be interesting to watch who is out, and who is in, after Inauguration Day on January 20th.

Conclusion

The composition of bankruptcy filings has changed a bit in the past few months, but the overall increase in filings remains high and remarkably steady. The rise in chapter 7 liquidation cases compared to wage-earner repayment plans is unmistakable and has been long-lasting. Although interest rate cuts are expected to weaken the need for businesses to file for bankruptcy, it is doubtful that this month’s unexpected drop in chapter 11s will continue. Although the rates of increase may not match the sometimes triple-digit monthly rises we saw earlier this year, it would not be surprising to see the number of filings rise again in November.

Besides watching the filing trends, lenders may also want to follow the game of musical chairs that follows every Presidential election. Those appointed to senior regulatory and enforcement positions will influence policy and affect private businesses in countless ways. Look for our next update on all these matters and more next month, if not sooner.