Bankruptcy Filings Hit 10-year Low, May Rise Again

By Diane Davis

Bankruptcy filings fell again in September, marking a 10-year low for any 12-month period, the latest figures from the Administrative Office of the U.S. Courts said Oct. 18.

Filings for the year ending Sept. 30, fell 1.8 percent compared to the same period a year ago. It was the smallest one-year decline since a national drop-off in filings began in 2011.

Annual filings totaled 790,830 through September, compared with 805,580 in the previous year. This was the lowest number of bankruptcy filings for any 12-month period since June 2007, the AOUSC said.

Consumers in Distress

“The numbers indicate that many Americans are still in precarious financial health — even though the filings are down—767,000 or so filings still represent a lot of financial pain for consumers,” Bruce A. Markell, a bankruptcy professor at Northwestern Pritzker School of Law, Chicago, told Bloomberg Law Oct. 18.

“The slowing of the rate of decline concerns me if, as most think may happen, interest rates start to rise,” Markell said. “That will result in many more filings—both consumer and business,” he said.

Christopher G. Bradley, an assistant professor of law at the University of Kentucky College of Law, Lexington, Ky., noted that “the overall decline is very small from the year ending Sept. 30, 2016, which suggests that the economy remains largely in the same place — that is, generally positive in terms of growth and outlook.”

“Of course there’s always the lurking risk of an unexpected downturn, particularly with an economic expansion having lasted as long as the present one has,” Bradley said.

“Until there’s trouble in the economy more broadly, I wouldn’t expect these filings to change dramatically,” he said, noting that household debt numbers are better indicators of changes in the filing rates.

“Many have said the trend of falling bankruptcies is leveling off, and these September numbers seem consistent with that prediction,” John Pottow, a professor at the University of Michigan Law School, Ann Arbor, Mich., told Bloomberg Law.

“Weather-related financial distress may cause a small bump in the future,” but it is “hard to say,” Pottow said.

Business Filings

In the business area, Bradley told Bloomberg Law that “it seems that the oil and gas industry has stabilized somewhat over the last year but the health and retail sectors are under stress.”

“If there is an economic slowdown and credit tightens up, filings could pick up very quickly,” Bradley said.

Chapter 12s Increase

Melissa Jacoby, a professor at the University of North Carolina—Chapel Hill, N.C., told Bloomberg Law she was concerned over the significant increase in Chapter 12 (family farmer) filings even though the overall number is small.

The statistics show that Chapter 12 filings totaled 508, an increase from 458 in 2016.

“The 2005 amendments to the Bankruptcy Code made Chapters 7, 11, and 13 more complex and expensive, but did not do the same for Chapter 12, which has long been supported by Sen. Charles Grassley (R-Iowa),” she said.

“Some observers have questioned whether Chapter 12 should be expanded to include other types of small businesses beyond farms and fisheries,” Jacoby added.

The administrative court’s office releases annual comparisons each quarter. Filings fell 2.8 percent to historic lows last quarter ending June 30.

A national wave of bankruptcies that began in 2008 reached a peak in September 2010 when nearly 1.6 million bankruptcies were filed, the AOUSC said.

Breakdown of Filings by Chapter

The number of bankruptcies filed by Bankruptcy Code chapter for the 12-month period ending Sept. 30, 2017, are as follows:

  •  Chapter 7 filings totaled 486,542, down from 498,367 in 2016.
  •  Chapter 11 filings totaled 7,052, down from 7,450 in 2016.
  •  Chapter 12 filings totaled 508, an increase from 458 in 2016.
  •  Chapter 13 filings totaled 296,599, down from 299,150 in 2016.

Business v. Non-Business Filings

The majority of bankruptcy filings involve non-business assets. During the 12-month period ending Sept. 30, non-business bankruptcy filings totaled 767,721, down from 781,123 in the previous year.

Business bankruptcy filings during the same 12-month period ending Sept. 30, fell to 23,109, from 24,457 in 2016.

In Chapter 7, a debtor’s nonexempt assets are liquidated by a trustee and the proceeds are distributed to creditors.

Chapter 13 allows individuals receiving regular income to obtain debt relief while retaining their property, but to do so, they must propose a plan that uses future income to repay all or a portion of their debts over a three-to-five year period.

Chapter 11 protects companies or individuals from creditors while they seek to reorganize their debt or liquidate under a plan that must be approved by the bankruptcy court.

Chapter 12 is designed to protect family farmers and family fishermen.

To contact the reporter on this story: Diane Davis in Washington at DDavis@bna.com

To contact the editor responsible for this story: Jay Horowitz at JHorowitz@bna.com

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