It has been quite the interesting year in bankruptcy so far, with filings increasing in several chapters. Providing some market observations based upon the number of filings for commercial and consumer bankruptcy filings can assist professionals in aligning their practice focus for the remainder of 2023. This requires an understanding of the current economic conditions, debt maturity dilemma, and how bankruptcy fits into the picture.

The Bankruptcy Data

Data collected by Epiq Bankruptcy provides state of the market observations, highlighting commercial and consumer bankruptcy filing trends. This data shows that the numbers are up across the board.

• Total bankruptcy filings were 217,420 during the first half of 2023, demonstrating a 17% increase from the 185,352 total filings during the first half of 2022.
• Getting more granular, total commercial filings were up 18% from last year and individual filings were up 17%.
• Chapter 11 commercial filings totaled 2,973 during the first half of 2023, which was a 68% increase compared to the first half of 2022.
• Small business filings, which are identified as Subchapter V elections of Chapter 11, totaled 814 in the first six months of 2023, demonstrating a 55% increase compared to the first half of 2022.
• Chapter 13 individual filings totaled 85,390 during first half of 2023, which was a 23% increase compared to the first half of 2022.
• All chapter filings increased in June 2023 compared to June 2022, with 37,700 total bankruptcy filings representing a 17% increase. Looking at June comparisons, commercial filings were up 12 percent and individual filings were up 18 percent.

The spike in bankruptcy filings may be puzzling as the economy seems fairly stable given the positive employment rate and the Federal Reserve’s attempts to curb inflation have had success.  

Uncertain Economy 

This year there has been unforeseen turbulence in the market coupled with uncertainty. What is different from the conditions last year is that the forecasted turbulence in 2022 was expected due to pandemic-related events. The comprehensive federal relief during the height of the pandemic brought relief to both corporations and individuals. The economy was clearly impacted by the blanket shutdown but 2023 has seen a rebound with higher employment rates, stable or increased home values, and supply chain relief.

However, many observers believe a recession is looming due to the massive debt accumulation during the pandemic. The economy is seemingly stabilized, but the enormous amount of outstanding corporate debt with upcoming maturities cannot be ignored. Given the debt maturity wall is looming, organizations may face significant challenges raising money in this interest rate high environment. There is also uncertainty in several industry sectors such as cryptocurrency, commercial real estate, and retail. The effect of student loan repayment could increase individuals filing nationwide. 

Predictions

It is truly an unprecedented and interesting time in bankruptcy. Observers are not clear on where the economy is headed. Chapter 11 filings are on the rise, but not nearly where the restructuring industry envisioned given the effect of the pandemic on corporate performance.  What will happen going forward? Below are five predictions and areas to monitor the remainder of 2023 and beyond.

1. An increase in Chapter 11 filings will continue into the near future. While many challenges have eased, the rate of inflation and increasing interest rates are impacting corporate action. As the cost of money increases, servicing debt will prove difficult and may warrant bankruptcy protection. The increase in Chapter 11 filings indicates that companies – predominantly middle market – are unable to fund their businesses and service their debt.
2. There will be more Subchapter V filings. Subchapter V provides a simpler, expedited, and less expensive way for qualifying small businesses to restructure their debts. The debtor can enter a repayment plan to pay creditors in exchange for retaining equity ownership in the company, providing continued viability for the struggling business. The increased eligibility limits for Subchapter V elections are currently set to sunset on June 21, 2024. The American Bankruptcy Institute has formed a task force to study small business reorganizations and issue a report of observations and recommendations to be released in April 2024.
3. The economy will remain disconnected for a while. Put simply, money is too expensive to borrow right now so there is little room for strategic growth. There has been rising inflation, tighter lending restrictions, and much higher interest rates. For a decade prior to the pandemic, rates were at historical lows. With these higher interest rates, companies facing liquidity challenges will be unable to secure adequate financing and will continue to struggle. As such, Chapter 11 has become a more useful tool as companies need to address their debt-ladened capital structure.
4. Student loan repayment will continue to be an uphill battle. Repayment compliance of student loans have been in a state of uncertainty over the past several years. While it may not rise to the level of an economic bubble, there is approximately $1.77 trillion of student loan debt outstanding. While no one can predict the ramifications of non-payment, one thing for certain is that it will affect the economy negatively. The current administrative relief programs may provide some relief but may not be sufficient to prevent borrowers from filing individual bankruptcy.
5. Several factors will continue to influence individual filing trends. According to USA Today, medical debt has contributed to about 66.5% of bankruptcies. This will persist, especially since medical costs have been increasing with inflation. Another factor to consider is affordable housing. Obtaining or refinancing a mortgage in this higher interest rate environment could lead to more bankruptcy filings. It’s interesting to note that foreclosures have been at an all-time low due to moratoriums, but that clearly cannot last. Finally, as more businesses feel the effects of managing larger debt thresholds, layoffs are inevitable which in turn will likely increase individual bankruptcy filings.

Guidance

Based on the current trends in the economy and the escalating bankruptcy numbers, bankruptcy professionals should brace for more filings across all chapters. This trend is evidenced by the spike in the number of filings as there will undoubtedly be a similar wave in the second half of this year as organizations consider their options to pay off outstanding debts.

Above all, having the right resources, expertise, tools, and partnerships in place to navigate the current landscape is needed. Now more than ever it is crucial to monitor lending trends and the overall state of the capital markets which can provide insight into the best strategies to stabilize businesses.