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The September 2022 official bankruptcy filing statistics bring to mind a musical oldie from Sonny and Cher, "The Beat Goes On.” The number of consumers and businesses seeking bankruptcy protection continues to trend upward as the economy grows more problematic and federal regulatory actions become more aggressive.

Overall, bankruptcy filings are up by more than seven percent compared to September 2021, led by another significant increase of more than 40 percent in chapter 13 filings (Figure 1). This is the second month in a row of an overall increase and the first back-to-back increase since January 2020, well over two years ago.   

Figure 1

Round Up of the Bankruptcy Filing Numbers

After two years of significant drops in bankruptcy filings, a new pattern is emerging with signs it may persist for quite a while. Although there undoubtedly will be zigs and zags along the way, more and more consumers and businesses appear to need bankruptcy protection. Chapter 13 filers, who are usually trying to retain their homes and automobiles, now constitute 44 percent of all filings. That far surpasses the historical norm of about one-third of all filings. That is due, in part, to drops in chapter 7 (liquidation) filings. 

The number of chapter 11 cases, which are mainly businesses, skyrocketed again by more than 71 percent compared to the previous September and reached the highest monthly filing number in the last two years. In addition, small business filings using expedited subchapter V procedures rose by more than one-half and continue to represent about one-third of all chapter 11s.

To put matters into perspective, the data from six months ago looked much different. In March 2022, total filings over a twelve-month period were down by 16.5 percent. In contrast, in September 2022, the decrease was only seven percent, reflecting a significant increase over the past six months. Also, in March 2022, the comparison to filings in the same month in the previous year showed a drop of more than 17 percent, whereas in September, the overall numbers increased by seven percent. 

National Economic and Regulatory Outlook

AIS does not have an econometric black box from which to project future national economic performance. But clearly, most economists are concerned about trends, even if not all the indicators are going in predictable directions. Again, to put matters into perspective, the prime rate charged for borrowing six months ago was 3.5 percent. By late September, it rose to 6.25 percent and may be going higher. Moreover, even though businesses are trying to hire more employees, the unemployment rate has edged upward from 3.6 percent in March to 3.7 percent, according to the latest Labor Department data.  

Other data show similar conflicting signs. According to the Wall Street Journal, Morgan Stanley recently reported that more retail stores open than closed last year for the first time since 1995. At about the same time, the Federal Reserve issued a report by Michael Smolyansky linking interest rates with lower corporate profits and offering no encouragement for future performance.

All this helps show why there is a perceptible increase in bankruptcy filings and why those filings may continue to climb and quite possibly quite steeply. It is also hard to see why chapter 7s would stay below previous year filing numbers. The higher cost of living is almost bound to draw down household cash (which was built in part by unprecedented government transfers during the pandemic), providing the cushion allowing many consumers to avoid filing for chapter 7 relief.

As all of this is happening, federal regulatory actions against financial institutions seem to continue to ratchet up. Very recently, newspapers reported what appear to be unusually high penalties imposed for regulatory violations. For example, one regional bank was tagged with $191 million in payments for overdraft violations and a group of the largest financial sector firms was tagged with $2 billion payments for use of unauthorized messaging systems. Moreover, the Justice Department recently unveiled a tougher new policy governing criminal corporate compliance violations.  

As filings increase and more attention is drawn to the plight of debtors, it is not hard to imagine greater regulatory scrutiny of default loan servicing to ensure that past violations and errors have not recurred since previous enforcement actions were taken.   

Conclusion

If current bankruptcy filing trends hold, lenders should brace for a lot more default loan and bankruptcy servicing challenges. Filings are still only about one-half of the pre-COVID level, and no one knows if those previous norms will return. Over the last ten years, the financial industry (secured and unsecured) has invested heavily in automation and other compliance tools. But those systems have not been tested in a high bankruptcy filing environment. With filings headed upward, the national economy in a somewhat precarious state, and financial regulators acting aggressively, the testing may be about to begin.

Commentary provided by Clifford J. White, Managing Director – Bankruptcy Compliance for AIS.