Chapter 11 bankruptcy filings spiked in 2023, totaling 6,569, a 72% increase over 2022, according to recently released data from Epiq AACER, as higher interest rates and inflation pushed highly leveraged organizations to the brink. Subchapter V elections within Chapter 11 — a reorganization option for small businesses — saw a substantial increase as well, up 45% to 1,939 filings.
The 2023 numbers represent a more normal level of bankruptcies after two years of fewer than 4,000 Chapter 11 filings. Overall commercial filings, including Chapter 7 liquidation cases, rose 19% to 25,627, and consumer bankruptcies rose 18%.
A greater number of large filings added to the Chapter 11 totals, as one large bankruptcy can generate numerous filings by affiliate organizations (e.g., an entity owned by the debtor).
Among the large notable bankruptcies filed in 2023 were SmileDirectClub, WeWork, Rite Aid, Party City, Yellow Trucking, Lordstwon Motors, Diebold Nixdorf, Vice Media, Bed, Bath & Beyond, David’s Bridal, Virgin Orbit, SVB Financial, Tuesday Morning, and Christmas Tree Shops. Last year was also a big year for repeat Chapter 11 filings.
“We expect the increase in number of consumer and commercial filers seeking bankruptcy protection to continue in 2024 given the runoff of pandemic stimulus, increased cost of funds, higher interest rates, rising delinquency rates, and near historic levels of household debt,” said Michael Hunter, vice president of Epiq AACER.
The uptick in business bankruptcies will likely continue, said Lindsay Zahradka Milne of Bernstein, Shur, Sawyer & Nelson, on a webcast following the data release.
“Lenders appear to feel more emboldened to exercise remedies, and that does spur a little bit more restructuring activity."
Lindsay Zahradka Milne
Bernstein, Shur, Sawyer & Nelson
“We certainly are seeing more borrowers engaging with their lenders and preparing to file,” Milne said. In the two years prior, said Milne, companies with liquidity issues had access to cheaper capital. In addition, “lenders were putting less pressure on their borrowers and less likely to enforce remedies because they didn't want to end up holding collateral of all of their borrowers at once.”
Now, however, the economy, though subdued, is showing signs of recovery. “Lenders appear to feel more emboldened to exercise remedies, and that does spur a little bit more restructuring activity,” Milne said.
Health care and senior and assisted living are sectors under increased distress and may produce more filings, Milne said. Their problems are due to “payor issues and the lack of flexibility that providers have when trying to adjust their balance sheets and their income statements for varying costs,” she said. “Then there's an extraordinary shortage of nurses in particular, but the labor force at large is also hamstringing that industry.”
Another factor that could boost Chapter 11 filings this year is what some experts call “the Peloton effect,” said Milne — a potential wave of bankruptcies from some of the businesses that supported the manufacturing of goods that became popular during the pandemic, like home-brew kits and sourdough bread makers.
“Product makers took out manufacturing space and entered into long-term supply agreements to gear up, and then suddenly the demand [shrank] back to more normal levels,” Milne said. “All of the businesses that supported that are probably going to pop up on our radars,” she said.
The popularity of Subchapter V cases should continue as well, as “savvy practitioners have learned how to deploy it, have educated themselves about how it's different from Chapter 11, and figured out ways to make it work for cases that might on their face appear to have more than $7.5 million in debt,” the cap for small business debtor reorganizations.
The wrinkle for subchapter V is that the liabilities cap of $7.5 million, set in 2020, was only temporary. It will sunset in June if not made permanent, said Milne, and the cap will revert to $2.8 million. The change would restrict the eligibility of future cases.