March 2016

The Rollercoaster Effect: Will Bankruptcies Tick Up in 2016 After the 2015 Decline?

Since the reform of the Bankruptcy Code in 2005, the number of cases filed has fallen. Samuel Gerdano and Ed Flynn of the American Bankruptcy Institute look at the total picture and predict the general number of filings will continue to fall, except for Chapter 11.



Samuel J. Gerdano, Executive Director, American Bankruptcy Institute

Samuel J. Gerdano, Executive Director, American Bankruptcy Institute

Ed Flynn, Consultant, American Bankruptcy Institute

Ed Flynn, Consultant, American Bankruptcy Institute

A total of 844,495 bankruptcy cases were filed nationwide in 2015. This was a 10% decline from filings in 2014 and a 47% decline from the most recent peak in 2010. Nearly 97% of bankruptcy cases involve primarily consumer debt, with the remainder consisting primarily of business debt.
Bankruptcy touches the lives of many Americans, whether as a debtor, creditor or employee. Approximately one-third of bankruptcy cases are filed jointly by a married couple, so even though filings are down, well over 1 million individuals filed for bankruptcy in 2015. In fact, about one out of eight adult Americans have filed for bankruptcy at least once in their life.

The three major types of bankruptcy are:

  • Chapter 7: About 70% of cases are filed under Chapter 7. In these cases a trustee sells non-exempt property of the debtor and distributes the proceeds to creditors. More than 90% of Chapter 7 cases are determined to be “no asset” cases because all of the debtors’ assets are exempt. Most no asset Chapter 7 cases are completed about four months after filing, while asset cases generally take two to four years to complete.
  • Chapter 13: Nearly 30% of cases are filed under Chapter 13. Debtors who have a regular source of income attempt to pay some or all of their debts over a three- to five-year period. About 35% of Chapter 13 debtors actually complete a repayment plan. The other cases result in dismissal or conversion to Chapter 7. More than $7 billion is collected and distributed to creditors in Chapter 13 cases each year.
  • Chapter 11: This chapter is for the reorganization of businesses and certain wealthy individuals. Fewer than 1% of bankruptcy cases are filed under Chapter 11. There are three other infrequently used types of bankruptcy including:
  • Chapter 12: Reorganization chapter for family farmers and fishermen
  • Chapter 9: Adjustment of debts by municipalities
  • Chapter 15: Cases that involve parties from more than one country

Trends in Bankruptcy1
Trends in Bankruptcy2

The chart shows total case filings by year since 2000. The official case filing data is compiled by the Administrative Office of the United States Courts (AO). The AO generally releases bankruptcy-filing data one to two months after the completion of a filing period.1

Since 2000, filings have increased during eight years and declined the other seven years. The average annual change, either up or down, has been 20% during this period. Three factors are largely responsible for the roller coaster effect in bankruptcy filings seen in recent years: bankruptcy reform in 2005, the U.S. economy and the changing nature of consumer debt.

Bankruptcy Reform

The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA) was signed into law in April 2005. Most of the provisions took effect in October 2005. The centerpiece of BAPCPA was the Chapter 7 means test. Debtors who could not pass this two-prong test of income and allowable expenses are supposed to repay some or all of their debts in a Chapter 13 plan.

BAPCPA has reduced the number of case filings by as many as 6 million over the last decade. Bankruptcy relief is still available to all who need it, but it is now a more cumbersome and expensive process.

Bankruptcies surged in the months between BAPCPA’s passage and its October 17, 2005 effective date. Filings eclipsed 2 million for calendar year 2005. After this surge, 2006 saw a 70% drop in filings. During each of the next four years, filings were up substantially, and had returned to pre-reform levels by 2010. (Without reform, filings might have exceeded two million cases per year from 2009 to 2011.) However, filings have fallen each of the last five years, and are now lower than any point since the early 1990s (except for 2006).

U.S. Economy

The Great Recession began two years after the BAPCPA became effective. Unemployment and foreclosures soared while home values, household income and stock values declined. Bankruptcy filings increased by over 30% each year from 2007 to 2009 — the first time this had ever happened.

There has been a modest recovery since the depths of the Great Recession: Unemployment is down since early 2010, home prices have regained some of their losses and incomes have been flat (as opposed to falling). Delinquent debt levels have also been cut in half since 2010. These improvements have been reflected in lower bankruptcy filing levels.

Bankruptcy filings have now declined for five consecutive years, with the cumulative drop from the 2010 peak approaching one-half. There have been 14 periods of declining bankruptcy filings in the last century. Most only lasted a year or two, with the cumulative decline from peak levels amounting to under 20%. The only two prior declines that lasted five years were from 1915 to 1920, and 1941 to 1946, coinciding with World Wars I and II.

Total bankruptcy filings are down by nearly half since 2010. The largest declines have occurred mainly in the West (California and Nevada are down by nearly 70%), and the New England states. In most of the Southeast, the rate of decline has been less severe.

The geographic pattern for filings in 2015 was much the same. However, in most states the rate of decline was lower in 2015 than it was in 2014. In fact, bankruptcy filings increased in Alabama during 2015 — the first annual increase reported by any state since 2011.

Chapter 11 Filings

Chapter 11 filings nearly tripled between 2006 and 2009 — showing the effects of the Great Recession. Since 2009, total Chapter 11 filings are down by more than half although Chapter 11 filings actually increased by .1% from 2014 to 2015.

New Generation Research2 has compiled data on the largest bankruptcy cases for many years. According to their report, during 2015 there were 19 filings by public companies with more than $1 billion in assets, 13 of which involved firms in the energy or mining business. This was the most such filings since 2010, but was well below the record set in 2009 of 52 large case filings. A majority of the largest Chapter 11 cases are filed in the District of Delaware or the Southern District of New York.

The last major overhaul of Chapter 11 occurred in 1978. There is an emerging consensus that Chapter 11 needs an updated toolkit to deal with new types of lending and increasingly complex debt and capital structures. The ABI Commission to Study the Reform of Chapter 11 issued its final report and recommendations in December 2014.3 The commission’s report incorporates recommendations of 13 advisory committees that examined key issues in corporate bankruptcies and testimony presented at 17 public hearings held from 2012 to 2014. More than 130 experts participated on topical advisory committees to thoroughly study Chapter 11 practice in the most comprehensive study of its kind in more than a decade.

Outlook for 2016

Barring some unforeseen economic development, we expect that total filings will probably fall for a sixth straight year, but the overall decrease will be lower than in recent years — possibly in the 3% to 5% range. Most of this decline will be with Chapter 7 filings. It appears that Chapter 13 filings have hit bottom and will show a small increase during 2016. We also expect Chapter 11 filings to show a small increase in the year — particularly by companies in the energy, mining, retail and health care sectors.

Footnotes

  1. A second source is Epiq Systems, which obtains data directly from the court databases and makes it available within a few days after the close of a period. The official AO figures, when released, are generally 2% to 3% higher than the EPIQ data, because of different methods used to accounting for reopened cases and intra-district transfers.
    See: epiqsystems.com
  2. See: bankruptcydata.com/researchcenter2.htm
  3. See: commission.abi.org/