Pandemic-Era Bankruptcy Low Filing Rates May Be a Thing of the Past

February 2023 bankruptcy filings rose by a hefty 18.2 percent compared to the same month last year. This uptick matched the January percentage increase. After falling during the first part of 2022, filings began to climb, slowing beginning last summer. The rapid acceleration experienced over the previous two months is the greatest since the Great Recession in 2009. If this trend continues, about 70,000 more cases will be filed this year than in 2022.

With total February filings of 32,032, all major chapters of the Bankruptcy Code saw a significant rise compared to last February. As has been the case for the past year, chapter 13s led the way with a huge increase of 29.3 percent. Chapter 7s, which have consistently lagged behind other chapters since the pandemic, are also in an upward tilt mode with a strong rise of 10 percent. Chapter 11 cases skyrocketed by 77.2 percent last month as they stay on a steep upward path. Small business subchapter V cases registered a solid gain of 23.9 percent.

Of course, there may be many blips ahead. But the strong filing rates in February continue a strong upward trajectory that may not stop very soon.

The current rocketing numbers may be fueled by the same economic conditions described in previous AIS reports, except now the fuller effects of adverse economic conditions are being felt in fuller force. The economic picture is mixed, but the positive data, such as lower unemployment rates, have not offset the hardships caused by the negative economic factors.

Historically, bankruptcy filings are influenced by macroeconomic conditions and more specific factors so that, during some periods, increased numbers of consumer and business debtors have needed bankruptcy relief during prosperous times. That makes sense because good times usually involve relaxed credit and more opportunities to make risky bets or take on too much debt.

In February, the Federal Reserve published data showing that revolving debt reached nearly $1.2 trillion in 2022, surpassing pre-pandemic debt levels. That is often a sure sign of economic travails to come for those in shakier economic circumstances.

A prominent chapter 13 trustee recently suggested that wage-earner repayment plans may continue to rise because of high home mortgage interest rates. In the past, some consumers who owned homes would walk away from their mortgages with confidence that they could buy another home in a couple of years when they could better afford it. Today, overburdened homeowners know they are likely to confront higher mortgage interests rates in the future and choose instead to make chapter 13 plan payments and keep the current family home.

The evidence continues to mount that consumers have lost their cash cushion from pandemic-era government assistance. The Wall Street Journal recently reported an estimate by Goldman Sachs that, by the end of the year, consumers will have spent down 65 percent of the cash they had built up during the pandemic. Other cited data showed that the problem is even more acute for lower-income Americans. As we know, those are the debtors who may be the first to be pushed over the bankruptcy cliff.

The prime rate now stands at 7.75 percent, which reflects an almost 140 percent rise from a year ago. That affects consumers and businesses across the board.

Perhaps the best summation of the national economic news was provided by the Director of Congressional Budget Office (CBO), who said:

"For 2023, we project stagnant output, rising unemployment, gradually slowing inflation, and interest rates that remain at or above their current levels at the beginning of the year – before the economy subsequently rebounds.”

The impact on consumers is detailed in a report by Ares, an alternative credit manager and lender (source: the Creditor Rights Coalition’s weekly Creditor Corner), which summarized the situation this way: "[S]avings are depleted and households increasingly turn to debt to finance their continue spending . . . . [W]e are seeing a rapid transition from increasing savings to increasing indebtedness at the microeconomic, household level.” Ares goes on to describe increased withdrawals in pension funds and "massive losses with residential mortgages” suffered by banks.

CBO also paints a gloomy picture on government debt levels, but we will leave the implications to economists, rather than bankruptcy watchers.

For now, all we can do is monitor next month’s bankruptcy filing numbers and see how lenders begin to cope with bankruptcy filing increases not seen in recent memory.

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