If at first you don’t succeed, try (and maybe try) again.
Basic Facts: Nomenclature and Numbers
When a previously reorganized debtor files a second chapter 11 case, courts and commentators refer to that continued entity’s second reorganization as a “chapter 22.” When a third case follows a second, “chapter 33” is a favored colloquialism; when a fourth, “chapter 44” is the name of choice. In practice, however, industry figures often denominate any repeat bankruptcy as a “chapter 22.”
Statistically, chapter 22 comprised approximately 15–18% of the chapter 11 cases filed between 1984 and 2013, and roughly 37% of such filings took place within three years of the reorganized debtor’s emergence between 2000 and 2019.
But then came the first quarter of 2023, per BankruptcyData. Through April 2023, there had been eleven repeat bankruptcies, exceeding the total in 2021 and 2022, and a sum surpassed only once since 2000. When Akorn Operating Company LLC appeared a second time before the same bankruptcy court, a benchmark was crossed: between January 1 and May 10, 2023, repeat bankruptcies “pil[ed] up at the fastest rate since the Great Recession.”
Recent chapter 22 cases seemingly share certain commonalities. Usually, the original debtor has failed to wipe away just enough debt or shed just the right unprofitable parts of its prepetition business in its first chapter 11 case. For recovering debtors with thin margins laboring under the shadow of recent insolvency, such decisions, even if perfectly reasonable at the time, brought doom once interest rates rose or inflation forced costs ever higher. Whether such simple bad luck really bears the brunt of the responsibility for chapter 22 cases, and what it says about the rigor with which bankruptcy courts apply chapter 11’s feasibility requirement, has always been, and remains, a matter of fierce disagreement among bankruptcy specialists and scholars.
Regardless of the underlying reasons and this ongoing debate, the current rate of growth in such repeat bankruptcies over the first half of 2023 is yet another portent of looming economic turbulence.
“[R]elapses follow common threads. Sometimes a company did not get enough debt off its balance sheet the first time. Or it didn’t shed unprofitable parts of the business when it had the chance, dooming its prospects when interest rates rose, or inflation forced costs higher.”
” There’s a debate among bankruptcy specialists about whether Chapter 22 is merely an unfortunate but necessary extension of a government safety net — or a sign Chapter 11 is too forgiving to large companies and needs to be stricter.”