Written by: Mike Senecal
Edited by: Lillian Guevara-Castro
Reviewed by: Adam West
The news initially reported in the Financial Times about credit card defaults hitting a 14-year high in data from 2024 (here’s an open-access link to a story about that announcement) got me thinking about where subprime lenders might feel the implications.
So I went out in search of context and found that the data analytics consultant S&P Global Intelligence also pegged corporate bankruptcies at a 14-year-high in 2024. Meanwhile, a report from the American Bankruptcy Institute (ABI) put total 2024 bankruptcies at a new post-pandemic high of more than half a million.
I’m not so casual with numbers to attribute a cause-and-effect relationship between credit card defaults and the recent spate of bankruptcies. But I don’t think it’s a coincidence, either. So we asked bankruptcy attorney Dick Davis to explain what he’s seeing from his perspective.
Dick is a shareholder at San Antonio-based Langley & Banack. He said the reports point to future challenges in subprime as more and more consumers and businesses see their credit credentials deteriorate.
I’ve edited a transcript of our conversation for brevity. Here’s Dick.
Like you, we’re seeing the headlines about the cost of living outpacing wage growth and credit card defaults at the highest level in 14 years. How do you see current high-level trends impacting the demand for bankruptcies?
Clearly, the interest rates are much higher on credit cards, and so the demands are also much larger. And with the inflation we’ve been dealing with, consumers have less money available to pay to begin with. I’m seeing plenty of people who need bankruptcy because of credit card debt.
There are also a lot of business-related cases out there. During COVID, the Small Business Administration gave everybody tons of money and kept a lot of businesses afloat. That money’s gone now, and those debts are going into default.
Everybody expected a big rash of business bankruptcies a couple of years ago that never came. My thinking is that businesses had enough to get by from these loans that have now run out.
I’m also seeing a big play from merchant cash advance (MCA) lenders who buy a portion of your receivables — say, $100,000 — and you agree to pay back $150,000 at $2,000 a day or something. That’s outrageous. When people can’t make the payments, they borrow from another MCA company and just run the cycle until they can’t get anymore.
How hands-on do you get with people on whether bankruptcy is a good fit for them?
You’ve just got to ask the right questions to figure out what the situation is. Generally, it’s not going to be hard to figure out because if they’re coming to you, they’re generally coming later than they should be. You need to react relatively quickly.
The initial meeting is key. You’ve got to have the right type of information to be able to help the individual or the business evaluate what they need to do. If you don’t ask the right questions, or you don’t have the right information, it’s hard to make the right decisions or direct your client to make the right decisions.
You’ve got to know their debt structure to determine whether it’s worth having the consumer or business’s finances, or if it’s better to start over.
Part of bankruptcy is dealing with the credit score impact. Do you get a sense of how that impacts people?
Most people are concerned about the loss of credit access. For consumers facing bankruptcy, generally, their credit score is so damaged that the sooner they file, the sooner they can start reestablishing their credit.
If you have job stability and income, it’s going to be easier to reestablish than if you’re self-employed and your income fluctuates. But most people seem to be able to deal with that.
They change their decisions and what they do, and I think that helps them going forward. Most people have a mortgage or a car, and as long as you keep making those payments, you can reestablish your credit.
But if you file for bankruptcy with, you know, $400,000 of credit card debt, there are probably going to be some people who are going to be a little leery of you. But if you file because of a business that failed, and you had attached personal guarantees, it’s easier to respond as long as you have a stable income.
What consumers can exempt in a Chapter 7 bankruptcy filing varies considerably from state to state. Along with Florida, my home state of Texas is very generous in its exemptions and gives people a pretty good ability to move forward without losing everything.
Dick Davis is a shareholder at San Antonio-based Langley & Banack, a full-service law firm specializing in bankruptcy, estate planning, litigation, and real estate cases for businesses, consumers, and government entities. Langley & Banack provides client-centered solutions in proceedings with regional and national implications.
