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Bankruptcy filings in Calendar Year 2023 ended with another bang. After three years of plummeting filings, the number of bankruptcies climbed at a rate that few predicted. All told, 445,119 individuals and businesses sought bankruptcy protection last year. 

For the entire year, filings under all chapters increased by 17.6 percent. The rate of growth accelerated as the year progressed. Last month, total filings were 16.1 percent higher than in the previous December. In only one month of 2024 did filings not rise by double-digits. The consumer chapters of the Bankruptcy Code (chapters 7 and 13) experienced double-digit increases once again, with chapter 7s leading the way. Chapter 11 reorganizations continued to rocket skyward, including small business cases. 

All this may result in another run-up in filings during the New Year. 

A Closer Look by Chapter   

Chapter 11 cases continued their phenomenal trend in December by increasing by 78.3 percent compared to the same month last year. Among those cases are subchapter V small businesses, which rose by 68.9 percent. For the entire year, chapter 11 filings increased by 69.1 percent, including a 41.6 percent rise subchapter Vs. Those eye-popping numbers may reveal a deep problem in the commercial environment that requires attention from policy-makers.       

The number of chapter 7 liquidation cases increased by 18.4 percent in December, maintaining a high pace of filings that picked up steam in the middle part of the year. The overall annual increase in chapter 7 filings was 15.6 percent. For reasons discussed many times in this space, when government largesse dried up last year, a large number of consumers without equity in property exhausted their savings and needed a fresh financial start without the cash subsidies provided throughout the pandemic.         

Chapter 13 wage-earner repayment filings went up significantly as well. Compared to last December, chapter 13 filings were 11.6 percent higher than in the same month of 2022. In contrast to chapter 7 filings, the number of chapter 13 bankruptcy petitions moderated mid-year, but continued to rise significantly in every month of 2023. The growth in chapter 13 filings raced ahead of chapter 7s for two years but appears now to be returning to more normal filing patterns.

Clues to 2024 Filing Trends

The biggest economic news at the end of 2023 was not the Federal Reserve’s decision to keep interest rates at their 22-year high but statements by Fed officials that interest rates may be cut by as much as 0.75 percent through gradual reductions this year. That would still leave interest rates sky high by recent standards, but the prospects of loosened monetary policy has led to a boomlet in stock prices. According to a headline in the Wall Street Journal (12/28/23), "Rate Cuts May Offer a Lifeline for Highly Indebted Companies” and at least delay the day of reckoning.          

The official Fed statement after its December meeting was silent about future reductions. Some economists also are cautious about predicting future cuts. The Economist magazine (12/16/23) expressed concerns about triggering higher inflation, which is still significantly above the Fed’s target of two percent. In an interesting piece printed in the Creditor Corner (12/17/23), Bruce Richards, CEO of Marathon Asset Management, said that the market may be overly optimistic about "how much the Fed will lower its funds rate in 2024.” A news article written by the Wall Street Journal’s Nick Timiraos even pointed out that the Fed was "careful not to rule out higher rates.” (12/13/23)       

But let’s assume that interest rates are cut in the spring or early summer.  Chapter 11 bankruptcy filings began their steep climb upwards only a couple of months after the Fed began its tight money policy less than two years ago.  Even with rate cuts, the costs of borrowing or refinancing will not be cheap.  Any impact on bankruptcy rates may require a long and sustained downward track on interest rates.         

Consumer cases may be even more impervious from the effects of modest interest rate reductions. As documented many times in this space, chapter 7 filings rose after the unprecedented flow of federal cash and other relief receded in 2022. As shown in the December figures, the rate of chapter 7 filings gained strength in the latter part of 2023, and unsecured borrowing returned to historically high levels.       

Chapter 13 filing rates may be more susceptible to interest rate changes because wage-earners sometimes can avoid bankruptcy by refinancing their homes. But filings under chapter 13 were the first to move upward in the latter part of 2021, and the rate of increase, while still high, has slowed as the shock of high interest rates and reimposition of foreclosures has factored into homeowners’ financial planning.       

Overall bankruptcy filings may be expected to increase significantly in 2024. But we will keep a close watch on interest rates, especially how they may affect chapter 11 business cases. 

Conclusion 

Bankruptcy filings in Calendar Year (CY) 2023 ended with another bang. After three years of plummeting filings, the number of bankruptcies climbed at a rate that few predicted. Consumers and businesses have experienced much distress over the past year. Unless economic conditions change, which the Federal Reserve has tried to do in some past election years, be prepared for one-half million filings over the coming year.

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

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