Downward Trend Continues in Bankruptcy Filings

Understand the complexities and nuances of the Bankruptcy Code to better advise clients and prepare for court.

By Diane Davis

Bankruptcy filings continue to fall with figures again showing that the pace of the decline is slowing.

Filings for the 12-month period ending March 31 fell 4.7 percent year over year, the Administrative Office of the U.S. Courts reported April 19.

Filings for the annual period totaled 794,492, compared to 833,515 for the year ending in March 2016.

The U.S. courts office releases annual comparisons each quarter. The filings decline reported in December was 5.9 percent, 6.3 percent in October and 6.9 percent last June.

“We may be approaching a new plateau soon, but it’s of course far too early to say,” John Pottow, a professor at the University of Michigan Law School, Ann Arbor, Mich., told Bloomberg BNA April 19.

Small Increase in Chapter 12

Total filings under each chapter of the Bankruptcy Code have decreased except for Chapter 12 , which increased slightly. Chapter 12 is designed to protect family farmers and family fishermen.

“The filings were up 4 percent, from 440 to 457,” Bruce A. Markell, professor of bankruptcy law and practice, Northwestern Pritzker School of Law, Chicago, said.

“That low a number is always subject to the vagaries of statistical variance,” Markell said.

“I would also look at where the increases were. If across the board, that’s one thing. If concentrated in one district (or two), it may be that a local attorney increased marketing, or a local farmer had a good experience and told his or her friends,” he said.

“The total number of Chapter 12 cases is sufficiently small that I’d hesitate to draw inferences from the modest increase unless the new filings were particularly concentrated in a limited geographic location or something to that effect,” Melissa Jacoby, a professor at the University of North Carolina at Chapel Hill, said in agreeing with Markell.

Breakdown of Filings by Chapter

The number of bankruptcies filed by Bankruptcy Code chapter for the 12-month ending March 31, 2017, are as follows:

  •   Chapter 7 filings totaled 488,417, down from 523,394 in 2016.
  •   Chapter 11 filings totaled 7,105, slightly down from 7,380 in the previous year.
  •   Chapter 12 filings totaled 457, an increase from 440 in 2016.
  •   Chapter 13 filings totaled 198,348, down from 302,193 in 2016.

Declining Chapter 13s

“The number that stands out most to me from the new report is the big decline in Chapter 13 cases,” Jacoby said.

“It would be interesting to see how that decline was distributed among districts, given that 7/13 filing ratios vary so greatly geographically,” Jacoby said.

“Academics have long worried about whether Chapter 13 was providing sufficient debt relief to financially distressed families. Given that the decline in Chapter 7 filings was much smaller than the decline in Chapter 13s, it is possible that at least some financially distressed households sought more comprehensive debt relief even if that means they had to forfeit property such as a home or car,” Jacoby said.

“But that explanation would require a more in-depth look at the district-level filings.”

Business v. Non-Business

The majority of bankruptcy filings involve non-business debts. During the 12-month period ending March 31, non-business bankruptcy filings totaled 770,901, down from 808,718 non-business filings.

Business bankruptcy filings during the same 12-month period ending March 31 fell to 23,591, from 24,797, the AOUSC said.

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.

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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