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The June bankruptcy filing numbers are in, and they show a continued upward spiral. Total bankruptcies numbered 37,922, or 17.42 percent above the number posted last June. For the first half of 2023, bankruptcies rose by 17.36 percent over the first six months of last year.          

When will these steep increases end? We previously reported on the Justice Department’s U.S. Trustee Program projection of a 75 percent explosion between 2022 and 2024. If that estimate proves correct, bankruptcy filings will fast return to the pre-pandemic normal. But that may be a lot higher than many credit providers imagined just a few months ago.  

Chapter-by-Chapter Round-Up         

Chapter 13 filings continued to set the pace for consumer filings, registering a 19 percent rise over June 2023. A combination of high interest rates, the need to protect a vast increase in home equity values, and the elevated cost of living all seem to be contributing to the expansion in chapter 13.           

The number of chapter 7 filings rose by 15.4 percent last month compared to last year. Coping with higher prices and the loss of COVID relief that keep countless families afloat during the pandemic continues to force more borrowers into chapter 7 where a trustee liquidates non-exempt assets in return for a discharge of debts.            

Maybe more portentous, chapter 11 filing marched upward in June by more than one-third at 35.7 percent. Small businesses in subchapter V almost DOUBLED by rising 98 percent last month. Businesses large and small face a precarious economic environment and, after years of low filings, now seem to require bankruptcy relief as much as consumers. 

Important Updates on Federal Student Loans                          

One of the potential accelerants that may further fuel the fire of increased bankruptcy filings is student loan debt. Currently, more than 40 million Americans owe about $1.7 trillion in outstanding student loans. The federal government's repayment pause due to the pandemic is ending soon, thanks to a recent debt ceiling compromise mandating repayment resumption from October. This could strain many household budgets. 

The Biden Administration's plan to forgive up to $20,000 in student loan debt, or about $430 billion in total, was halted by a Supreme Court ruling in Biden v. Nebraska. The court ruled that the President lacked the authority to cancel payments. Pursuing other statutory justifications to provide relief faces potential opposition and legal challenges. 

With student debt relief options dwindling, bankruptcy may become a more popular option, despite the past difficulty in discharging student loans due to the "undue hardship" standard in the Bankruptcy Code. Over recent years, bankruptcy courts have increasingly discharged student loans, and the Department of Justice (DOJ) announced more debtor-friendly standards. 

The end of the repayment moratorium and lack of loan cancellation likely means more borrowers exploring bankruptcy relief. Pressures on the DOJ to discharge loans are expected to increase, leading to more student loan bankruptcies.

Other Economic News

To the extent that broader national economic developments help drive bankruptcy filings – and they do, at least to some significant extent – the following headlines may be telling: "Get Ready for the Full-Employment Recession" (Wall Street Journal, June 3, 2023); "Struggling Companies That Got Debt Lifelines Are Failing Anyway" (Bloomberg, June 6, 2023); and "Student Loan Pause is Ending, With Consequences for Economy" (New York Times, June 21,2023).         

Although Federal Reserve skipped a month in its long-standing hikes in interest rates, most economists expect the rate climb to resume later this summer. In any event, without a reduction in rates, consumers and businesses will continue to pay about twice as much in interest as they did about a year ago.         

According to the Wall Street Journal piece referenced above, economic productivity ("output per hour worked") is "cratering." The June 18th online Creditor Corner publication contains interesting commentary about the current business default cycle. Bankruptcy lawyer Bradford Sandler of the Pachulski law firm concludes that business "restructuring professionals will continue to have a busy 2023 that most likely will continue into 2024." 

Add to this recent commentary from banking regulators and outside experts suggesting that enhanced banking regulation for mid and even lower-tiered financial institutions is right around the corner. That may be good or bad for the overall economy, but it certainly means greater scrutiny and cost for bank operations.         

Conclusion

June bankruptcy filing statistics, and other economic reports, tell "the same old story” we have heard before: bankruptcy filings are climbing at a rate not seen since the Great Recession more than a decade ago. Neither micro (e.g., student loan debt) nor macro (e.g., interest rates) economic data provide signs of a slowdown. Government projections show a return to the 2018-2019 filing rates over the next two years, doubling last year’s filing number. Now may be the time to believe the government experts.  

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

One of the potential accelerants that may further fuel the fire of increased bankruptcy filings is student loan debt. Currently, more than 40 million Americans owe about $1.7 trillion in outstanding student loans.  Beginning with the COVID pandemic, the federal government paused repayments. That pause turned into a long hiatus which is about to end. As part of the recently enacted debt ceiling compromise, Congress mandated a resumption of federal student loan repayments. Specifically, interest will again be charged starting on September 1st and payments must recommence in October. Ideally, borrowers prepared for this long-anticipated change. But it is likely that a lot of younger adults, as well as their parents and even grandparents, may be shocked by the added cost in their family budgets and become stretched beyond their ability to pay on time.

In addition to the generous loan deferments provided during the pandemic and for months beyond, the Biden Administration planned to forgive households up to $20,000 in student loan debt. In total, about $430 billion owed to the federal government would be cancelled outright. But the Supreme Court just dashed that expectation in the Biden v. Nebraska, et al. case. On June 30th, by a 6-3 vote, the High Court ruled that the President lacked authority to cancel student loan payments. Writing for the majority, Chief Justice Roberts said that cancelling the debt would amount to rewriting the law "from the ground up” which the Executive Branch may not do.           

Although the President is now pursuing alternative statutory justifications to provide student loan debt relief, any option is sure to face fierce opposition in Congress and strong challenge in the courts.           

With two doors for student debt relief closed in recent weeks, will filing bankruptcy become a third and perhaps final option? In the past, it has been extremely hard – many would say unfair and nearly impossible – for student loan borrowers who are way over their heads in debt to find relief in the bankruptcy system. As previously explained on this web site, the Bankruptcy Code makes student loan debt non-dischargeable unless the debtor can show that repayment would create an "undue hardship.”       

Both conservative and liberal jurists have decried the "draconian” gloss that many courts put on that standard. Some of the most outlandish cases involved a requirement that a debtor show utter "hopelessness” of medical recovery or condemnation of seeking a pastoral degree because churches simply do not pay sufficiently high salaries to permit repayment.           

Over the last couple of years, bankruptcy courts have granted more and more student loan discharges than in the past. In addition, the U.S. Department of Justice (DOJ) announced more debtor-friendly standards for determining whether to oppose borrowers who assert an "undue hardship.” Neither DOJ nor the Department of Education has publicly revealed much information about the administration of these new standards, including how many debtors have applied and how much money debtors’ attorneys are charging to fill out the extra paperwork.           

With the end of the student loan repayment moratorium and dashed hopes for loan cancellation, it is a sure bet that a large number of education borrowers will begin to explore bankruptcy relief. Most of those who would face difficulty in repaying student loans also carry other debts as well, such as credit cards, that could be wiped out in bankruptcy. 

Pressures on DOJ to agree to discharges of federal student loans almost certainly will grow in the coming months. That will inevitably lead to more student loan debtor bankruptcies. The only question is how many more.   

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