15 Years of Credit Slips

Today marks fifteen years of the Credit Slips blog. We started modestly on this date in 2006 while we were in the throes of doing all the tedious ground work for what would be the 2007 version of the Consumer Bankruptcy Project. After 15 years, I think I can reveal that I had originally proposed--and I am not making this up--a different name for the blog. Proof of the bona fides of that big reveal are to the right, which was the original mockup of the blog banner. Much, much wiser heads prevailed. The blog got a different name, and Credit Slips was launched. Many thanks to all of our bloggers over the years, both regulars and guests, but especially many thanks to our readers who have helped us create this little corner of the Internet that we will keep going as long as you'll have us.

Bankruptcy Filing Rates Not Rising, May Go Lower

The latest data from Epiq Systems shows that year-over-year bankruptcy filings dropped again in May after an increase in April. The April and May figures are particularly important because they give us two months of year-over-year comparisons with post-Covid data.

In April, there was an average of 1,860 filings per day which was an increase of 6.4% from the previous April. That uptick made me wonder whether we were beginning to see the long-predicted increase in bankruptcy filings because of the pandemic. That speculation proved premature because the May figure was 1,738 filings per day, which was not only a decrease from April but a year-over-year decline of 13.1%.

Whether the April increase or the May decrease ends up being the one-month blip is something we will learn over the next few months. It is that kind of insight you are looking for when you come to this blog--the future will reveal the future. It is much easier, however, to come up with a story that April was the anomaly than vice versa.

Bankruptcy filings are seasonal, spiking in the early spring. Ronald Mann and Katie Porter persuasively documented the reason for that is tax refunds going to pay the cost of the bankruptcy filing. Usually the effect runs from February to April with a peak in March. This year, the IRS tax filing statistics show that refunds ended up being higher overall than last year but started more slowly. There was also a third round of stimulus payments in March that capped out at lower-income levels and at levels that are more typical for bankruptcy filers. For these reasons, what we saw in April might have just been the usual annual seasonality in the filing rate, just pushed back a bit by later-filing tax filers and the stimulus money.

Welcome to Chris Odinet

On behalf of the other Credit Slips bloggers and myself, I would like to welcome Professor Chris Odinet as a guest blogger. Chris is a professor at the University of Iowa College of Law and is part of a new generation of scholars in the consumer finance space that our readers should know about. He already has an impressive list of scholarly publications and part of important conversations in consumer finance, especially fintech. Welcome, Chris, to Credit Slips.

Bankruptcy Filings Are Still Super Low--Don't Believe the Headlines

Headlines recently appeared in the usual places about a big March jump in bankruptcy filings. It is true that March 2021 total bankruptcy filings were 43,425 (according to the Epiq Systems data) and that was a 39.1% increase from February 2021. That looks like a big jump. Of course, March is a longer month, and in fact this March had four more business days than February--almost an entire extra work week. Calculating the filing rate per business day, the March 2021 filing rate was a 14.9% increase from February 2021.

That still feels notable, but let's be careful--very careful. Bankruptcy filings are at historically low levels. When any data series hits a trough and starts creeping back to an old base rate, the increases will feel really big although we are really only getting back to what we had experienced previously. The February filing rate was 1.13 filings per 1,000 persons, the lowest since January 2006 when bankruptcy filings fell to almost nothing after the surge to beat the effective date of the 2005 bankruptcy amendments. (To give you a sense of the surge, the October 2005 rate was 25.53 filings per 1,000 persons.)

Fantastic SBRA Resource from Judge Bonapfel

As Credit Slips readers know, the Small Business Reorganization Act added subchapter V to chapter 11 of the Bankruptcy Code earlier this year. My go-to resource on subchapter V has been a thorough summary written by Judge Paul Bonapfel of the U.S. Bankruptcy Court for the Northern District of Georgia. It is available for free on the court's web site, and with Judge Bonapfel's permission, I wanted to spread the word about the guide's availability. Judge Bonapfel has just done a November 2020 update of these materials with all of the recent cases. The update is a new chapter at the end of the materials that functions like a pocket part (for those of you who remember pocket parts!). Thank you Judge Bonapfel for this great service to the profession!

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

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.

Of Sheep, Twyne's Case, and a Better Story

Professor Emily Kadens has just published a great paper that explodes the myths about Twyne's Case. We all know Twyne as the case where an insolvent farmer gave away his sheep, thereby leading to a Star Chamber decision that laid the foundation for modern fraudulent conveyance law. It turns out most all of the story we know isn't true. Even better, the actual story is much more interesting and instructive.

Kadens did an incredible amount of archival research, going through the depositions and other original records from the case. Obstacles included documents that had been partially eaten by rats, a point I need to remember the next time I want to complain about difficulties with my own research.

Pearce, who was the debtor, had resisted writs of execution from the undersheriff who had come to seize his property, which was a lot more than just a few sheep. And, it was not Pearce himself, but his laborers and community members who did the resisting. Confrontations occurred over three days.  After an unsuccessful foray to Pearce's farm on the first day, the undersheriff made somewhat of a surprise attack on the second day to seize cattle at a more distant place called Holden Field (the picture to the right, courtesy of Kadens). The undersheriff pastured the cattle overnight at Pole Meadow (pictured below the fold, again courtesy of Kadens). The next day, the undersheriff attempted to drive the cattle to market, but Pearce's allies interceded and took the cattle.

For Your Bankruptcy Class or Presentation

OK, bankruptcy mavens. What is this a map of? Answer below the fold.

Should Chapter 11 Protect the Sacklers?

My colleague, Ralph Brubaker, and Gerald Posner have a New York Times op-ed assailing how the Sacklers are using Purdue Pharma's chapter 11 to shield themselves from personal liability. The bankruptcy world knows this tactic under the labels of third-party or nondebtor releases.

When they first appeared on the scene, third-party releases seemed like another example of the pragmatic problem-solving that the bankruptcy system excels at doing. Parties contribute money to the pot that goes to pay creditors, often victims of some tort. That money increases the amount that victims receive without having to suffer the time, expense, and uncertainty of having to file lawsuits. The release incentivizes the released parties to contribute in the first place. No contribution, no release.

Like many good ideas in the bankruptcy system, third-party releases were supposed to be the rare case but have become commonplace in chapter 11 practice. As Brubaker and Posner point out, if third parties like the Sacklers need protection from tort liability associated with Purdue Pharma, they can always file bankruptcy themselves. They want the protection of the bankruptcy court without subjecting their own assets and affairs to the scrutiny of the bankruptcy court. At the least, that needs to change.