Without warning, total bankruptcy filings increased by only 6.6 percent in June 2024 compared to last June. This is a notable slowdown compared to the approximately 17 percent overall increase we’ve been accustomed to since last year. However, in contrast to this modest rise, chapter 11 cases surged by 83.2 percent, aligning with long-term trends. One factor to consider is that June 2024 had two fewer workdays than the previous June. The last time we observed such a decrease in monthly growth, it was also attributed to fewer workdays, followed by a quick return to larger double-digit increases.
A Closer Look by Chapter
The number of chapter 7 cases increased by 6.7 percent. If we account for the two missing workdays in June 2024, then this aligns with longer-term trends. It is hard to see any changes in the essential dynamics that have catapulted chapter 7 over the past year and a half.
Chapter 13 filings saw a modest increase of 3.37 percent, consistent with the long-term trend of chapter 13s lagging behind chapters 7s. This is partly because chapter 13s surged more than two years ago, and a slowdown was inevitable. The increases in chapter 7 cases, which typically account for more than six in ten filings, have more than compensated for the slower pace of chapter 13 filings.
Chapter 11s soared by 83.2 percent. While there have been even more dramatic increases in previous months, some of which are affected by the multiple filings of affiliates of a large debtor, corporate reorganizations continue to rise steeply. Subchapter V small business cases nearly matched the overall chapter 11 pace. It will be interesting to see if these rates subside appreciably now that Congress has reverted to significantly lower debt eligibility limits, as described below.
Hello to Lower Debt Limits for Subchapter V and Chapter 13
In 2019, the President signed the bi-partisan Small Business Reorganization Act (SBRA), also known as or Subchapter V of chapter 11. This act provided more debtor-friendly rules and a streamlined process for the reorganization of businesses with no more than about $2.7 million in debt. The COVID pandemic struck within weeks of the law’s effective date, prompting Congress to temporarily increase the debt limit to $7.5 million. This increase was extended through June 21, 2024, when it expired.
That largely explains the surge in subchapter V cases filed during the first part of June. In an apparent effort to beat the deadline, 312 subchapter V cases were filed in June, a number vastly higher than we’ve seen before.
More than 25 percent of subchapter Vs carry debt above the original limit. This means that several hundred small debtors annually who would have filed under the streamlined process are no longer eligible to file. These small businesses may face three options: liquidate under chapter 7, enter the more expensive regular chapter 11 process, or not file bankruptcy at all. We will soon begin to see how overall chapter 11 filings are affected by this significant change in bankruptcy law.
Less discussed is the expiration of the higher chapter 13 debt limits, which have decreased from about $2.7 million to approximately half that amount for secured debt. The impact is expected to be less widespread for chapter 13 cases because the higher debt limits were primarily designed to assist debtors with large mortgages in areas with high housing costs.
There are Congressional efforts to revive both the subchapter V and chapter 13 debt limits, but the prognosis is unclear. For more insights, join us at AIS’ upcoming webinar.
The Meaning of the Supreme Court Decision in Purdue Pharma
The Supreme Court decision in Harrington v. Purdue Pharma, LLP has been called the most important bankruptcy case of the last thirty years. Handed down on June 27th and detailed in an AIS News Alert you can read here, the High Court ruled that bankruptcy courts lack the authority to grant non-consensual releases to third parties who do not file their own bankruptcy cases.
Purdue Pharma manufactured and distributed OxyContin, a key player in the nation’s opioid epidemic. The debtor’s reorganization resolved thousands of lawsuits filed against the company, but it also wiped out the debt of Purdue’s owners, the Sackler family, and others who faced lawsuits filed against them. The Sacklers never filed for bankruptcy but contributed $6 billion to a victims fund under the plan. Although most known creditor victims approved the plan, thousands wanted their day in court against the Sacklers, many of whom were parents of children who overdosed on the drug.
In a 5 to 4 majority decision, Justice Neil Gorsuch wrote, “nothing in present law authorizes the releases.” While some view this as a setback for businesses that have sought bankruptcy protection through creative reorganization plans that avoided litigation of tort liability, the court ruling may benefit creditors in both business and consumer cases by limiting the discretion of bankruptcy judges, whom some companies may view as overly debtor-friendly.
Let’s hope the decision creates a greater balance for all stakeholders and ensures that all courts and parties operate within statutory commands written by Congress.
A Round-Up of Some Other Economic News
As in many recent months, the economic news was mixed in June.
Conclusion
Total bankruptcy filings continued to rise in June, albeit at a moderated pace for the mostly consumer cases filed under chapter 7 and 13. This slower pace is largely attributed to the two fewer workdays this June compared to last. However, business reorganizations continued their alarmingly upward trend. Subchapter V cases increased by a stark 79.8 percent, but this number may plummet with the new, lower debt eligibility limits now in effect.
It will be interesting to see if the July and August summer doldrums result in a flattening of increases, as observed in June. Tip: Don’t bet your pandemic-era 2.5 percent mortgage on it.