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Total bankruptcy filings increased by 21.5 percent over the same month last year. This reflects a continuing trend we have seen during all of 2023. In ten out of the eleven months this year, we have observed double-digit percentage increases in filings compared to the same month previous year. So far this year, total filings are up by 17.8 percent. We have not experienced such a sharp upward spiral since the country emerged from the economic meltdown of 15 years ago. 

A Closer Look by Chapter

For the third time this year, chapter 11 reorganization filings more than doubled over the same month last year. It is not much of an exaggeration to say that the increase in chapter 11 filings is of almost epic proportions. Chapter 11 filings in November 2023 were an incredible 152.1 percent above those in November 2023. Such spikes are often due to a few mega-filings involving a large number of affiliates. The number of small businesses that filed under Subchapter V went up by a hefty 72.5 percent, showing that the business distress is not confined to a few over-leveraged retailers or commercial real estate giants but is more pervasive.         

Continuing with the same old theme you have read here before, chapter 7 liquidation cases skyrocketed once again by 20.3 percent. Those facing higher prices (remember: slowing inflation does not mean prices are dropping) and a higher cost of debt (interest rates have stabilized at a 22-year high) are feeling a squeeze like they have not felt for many years. There is no way to sugar-coat the financial anxiety facing those who lack economic security during a time of adjustment for the national economy. For those who are still just making it, the Christmas Season will likely push many of them over the abyss. Their bankruptcy filings will begin to appear in the latter part of the first quarter of 2024.         

Chapter 13s went up by 19.4 percent. There has been a steady rise in chapter 13s for more than two years, so continued increases are unsurprising. Down the road, rt will be interesting to see if improved employment numbers, combined with the persistently high interest rates and cost-of-living, cause another surge in bankruptcy filings by homeowners (who have few refinancing options these days) or if the steady upward trend continues. 

Other Economic Signals Worth Watching       

• Small Businesses: The Wall Street Journal Pro ran an interesting piece about interest rates on small business loans exceeding nine percent. According to the story, "[w]ith borrowing costs double their levels from just two years ago, many small businesses are pulling back, another sign of how higher interest rates are cooling the economy.”  [WSJ Pro, 11/14/23]
      
• Interest Rate Moves: Just as some economists were beginning to hold out hope of a modest decrease in interest rates in 2024, along came JPMorgan Chase CEO Jamie Dimon to throw cold water on that kindling hope.  According to Mr. Dimon, interest rates may reach 7 percent before the Fed is done raising rates, "inflation is hurting people” and may go higher, the world situation is dangerous, and a recession is still possible. [CNN.com, 11/29/23] Mr. Dimon has been somewhat more pessimistic than other financial mavens over the past couple of years, but his straight-talk continues to command attention and merits careful consideration.
  
  
• Student Loans: The Biden Administration’s efforts to make bankruptcy a more viable option for student loan borrowers in dire straits does not seem to have led to more filings. As reported here earlier, the Justice Department and Education Department softened the criteria by which they would oppose the discharge of student loans. However, only 632 borrowers have applied under the new process. With payments now coming due after a long hiatus, however, the pressure on student loan borrowers may rise in the coming months. [WSJ, 11/16/23]        

In addition to the student loan payments coming due for 1.4 million borrowers, many of these debtors also bear the weight of other high credit payments. According to a study by Transunion and Boston Consulting Group, those owing student loans "could become seriously delinquent” on credit cards and other loans.  [Bloomberg News, 11/15/23]     

Conclusion

Peeling away all the static and we are in the closing stretch of 2023 with bankruptcy filings going up even faster than earlier in the year. The economic dynamics leading to these increases do not show signs of abating, even if interest rates and the cost-of-living stabilize. Lenders will require a lot of skill in managing a higher number of defaults and customers who may believe they have alternatives , except for bankruptcy, to protect themselves and their families.       

Despite the challenges, may all who read this blog have a Joyous Holiday Season!  

Commentary provided by Clifford J. White, Executive Vice President – Bankruptcy Compliance for AIS.

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