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Most of What You Read about the Bankruptcy Filing Rate Is Wrong

posted by Bob Lawless

A popular narrative is that bankruptcy filing rates are increasing dramatically. That is not true. If you want to know what is happening with the bankruptcy filing rate during covid-19, the best source is Ed Flynn's analyses over at the American Bankruptcy Institute (current analysis here with a historical archive here). Here some facts, using my own data as well as Flynn's very useful numbers:

  1. Total bankruptcy filings have had some modest gains in recent weeks after falling off the cliff early in the crisis, but total filings remain down 33% on a year-over-year basis.
  2. The number of chapter 11s filings has been very artificially inflated by counting affiliate filings. If one only counts the "parent" and "solo" filings, the chapter 11 rate actually declined in July!
  3. The decline in chapter 13 filings has been much deeper than the decline in chapter 7 filings.

Before expanding on each of these points and like I wrote in an earlier post with the same theme, I am not Pollyannaish about the economy. Things are as bad as they seem. My plea is for accuracy. An understanding of whether and when people turn to the bankruptcy system to help them deal with their business or personal issues makes that system more effective.

Year-Over-Year Bkr Filings.2018 to 2020First, let's look at total bankruptcy filings. According to data from Epiq Systems, they did rise in July 2020 as compared to June 2020. The increase was 1.0%, which is a number greater than zero. On a year-over-year basis, bankruptcy filings were down 33.4% in July 2020. (My numbers are always done on a per-business-day basis because the number of business days in a month affects the number of filings.) The big picture, as shown in the graph to the right, is that the bankruptcy filing rate has plummeted. There undoubtedly will continue to be increases in the filing rate as the rate works back to the baseline. We may even move above the baseline at some point and see increases. If I had to bet, I bet we will, but when we will and how big the increases will be are quite uncertain.

Next, let's consider the chapter 11 rate, which was the subject of a previous blog post. Let me try this again. When a corporate group with lots of subsidiaries files, each of the subsidiary has to file a separate chapter 11 petition. You have one economic unit filing bankruptcy but many chapter 11 filings. The total number of chapter 11s is easy to find but virtually worthless as a meaningful number.

Flynn has done the hard work of doing a meaningful chapter 11 count, coming up with the number of "parent" and "solo" filings after eliminating "child" filings, which are the affiliates of a parent. His analysis is weekly, so it does not match up exactly with the month of July. Here are my totals of Flynn's weekly numbers from June 29 - August 2:

  Total 11s "Solo" & "Parent" Cases "Child" Cases
2019 529 360 169
2020 786 337 449

On the raw count, there is a 48.5% increase in chapter 11s during that time. That makes for a great headline and fits the narrative. But, if we count only "solo" cases with one filer plus only the "parent" filing of an affiliate group, chapter 11 filings actually declined by 6.4%.

As the table shows, there are far more "child"/affiliate filings in 2020. The reason for that is probably that large chapter 11s are up. Again, no one is contending that things are going great. Large chapter 11s will have more affiliates. Also, there have been quite a few large chapter 11 retail bankruptcies with lots of affiliates with individual properties of the larger corporate group.

And, there is the chapter 13 filing rate. What largely has escaped attention is that chapter 13s have especially declined. Again using Flynn's counts, chapter 7s declined by 16.5% on a year-over-year basis from June 29-August 2, and chapter 13s have declined by a whopping 51.3% over the same time period. The reasons for this are unclear. Perhaps the reason is the foreclosure moratorium on federally backed mortgage given that chapter 13 is seen as the "save the home" chapter. Perhaps chapter 13 is more discretionary than chapter 7 and is driven more by supply than demand. There is likely a blend of reasons.

I have little hope that we will see the end of simplistic analyses looking at overall bankruptcy filing rates as an indicator of economic conditions. The numbers are easy to find and easy to report. If you want a more careful analysis, follow Flynn's weekly reports. I will try to post more reckless analyses here.

Comments

My experience with consumer filings suggests that the delay between an economic downturn (primarily the unemployment rate)and a bankruptcy filing is how long the consumer can forestall a disruptive collection action by a creditor -- primarily in the form of a notice of foreclosure, a vehicle repossession, or a garnishment.

Given both governmentally imposed and voluntary forbearance by creditors, coupled with 2d Qtr reports showing a decline in consumer debt and an increase in savings, I am not surprised that that consumer filing rates did not immediately increase.

Further, I am guessing that consumers are distracted by more pressing issues such as avoiding illness, working at home while corralling their children, deciding schooling options, wondering if furloughs will turn into layoffs, etc.

Finally, I wonder if consumers are waiting to see what additional government stimulus or forbearance options will be made available before deciding to take a leap into bankruptcy.

That being said, unless COVID is quickly conquered, we can only kick the can down the road so far before the impact of this historic economic downturn is felt by consumers to such a degree that we may see an equally historic uptick in Ch. 7 and 13 bankruptcy filings.

I agree with the Hon. Kevin R. Anderson's post addressing some of the reasons why consumer filings have dropped. I would add that the foreclosure moratoriums and slow down of collection activity has also played a role in the decrease in filings. The normal triggers that push individuals to start looking at bankruptcy as an option, stopped. The pro se rate of filing has also dropped significantly. I would also add that the lock-downs forced agencies and law firms to shut down, or remote work which makes processing cases a little more cumbersome. Query- what happened to the "no money down" theory with 13 cases dropping?

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  • As a public service, the University of Illinois College of Law operates Bankr-L, an e-mail list on which bankruptcy professionals can exchange information. Bankr-L is administered by one of the Credit Slips bloggers, Professor Robert M. Lawless of the University of Illinois. Although Bankr-L is a free service, membership is limited only to persons with a professional connection to the bankruptcy field (e.g., lawyer, accountant, academic, judge). To request a subscription on Bankr-L, click here to visit the page for the list and then click on the link for "Subscribe." After completing the information there, please also send an e-mail to Professor Lawless (rlawless@illinois.edu) with a short description of your professional connection to bankruptcy. A link to a URL with a professional bio or other identifying information would be great.

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