Bankruptcy Increases in the US: A Reasoned Perspective

19 Sep, 2023

Bankruptcy Increases in the US: A Reasoned Perspective

Commercial bankruptcy filings are on the rise in the United States, with notable companies like Bed Bath & Beyond, Silicon Valley Bank, and Party City succumbing to financial pressures. Epiq Bankruptcy, a provider of US bankruptcy filing data, reported a total of 2,328 bankruptcy filings in August, marking a 14% increase from August 2022 and a 17% rise from July. The US bankruptcy court recorded 15,724 bankruptcies for the fiscal year ending on June 30, 2023, representing a 23% increase over the previous year.

However, these developments should not come as a shock. Several factors contribute to this trend, including the depletion of pandemic relief funds, persistent inflation, a slower global economy, and historically high-interest rates. American businesses are grappling with the aftermath of a prime interest rate that stood at just 3.25% a mere 18 months ago and has since climbed to 8.5%. Such a rapid increase has made managing debt and accessing capital significantly more challenging.

Nonetheless, it's important not to succumb to panic. While bankruptcy rates are indeed higher than in recent years and are trending upward, they are far from the levels seen during the Great Recession or previous economic downturns. The fiscal year total of 15,724 commercial bankruptcy filings still falls well short of the 22,483 filings recorded in 2019, a robust pre-pandemic year.

As for high-profile corporate bankruptcies, they often result from strategic missteps or changing market dynamics. Silicon Valley Bank's decision to invest heavily in treasuries as interest rates rose, for example, was a move fraught with risk. Bed Bath & Beyond faced increased online competition, while the pandemic dampened the mood for parties.

While bankruptcy is undeniably a negative development, there are positive aspects to consider. Unemployment remains low, the economy is still expanding, and entrepreneurship is on the rise, creating numerous opportunities for displaced workers to find new employment. However, it's crucial to acknowledge that the closure of any business has indirect repercussions on the local real estate market, the community, and the small businesses that rely on it.

There is a silver lining for small businesses facing bankruptcy with debts under $7.5 million. They can take advantage of the Small Business Reorganization Act, a subchapter of the bankruptcy code designed to streamline the process, reduce bureaucratic hurdles, and facilitate a fresh start.

In essence, bankruptcy can serve as a means of resetting the business landscape. After the 2008 recession, the excessive number of nail salons near my home dwindled, and poorly managed restaurants closed their doors. Retail stores selling less desirable products learned the value of consumer discretion when money was tight. Unscrupulous individuals engaged in financial wrongdoing were exposed when funds became scarce, limiting their options for fraudulent schemes. Overvalued stocks found their way back to more realistic valuations.

Successful business owners who weather challenging times and economic downturns without succumbing to bankruptcy tend to share common traits. They excel in their respective fields, practice prudent financial management, save wisely, invest judiciously, avoid succumbing to hype, and refrain from overspending during economic booms, recognizing that downturns are an inherent part of the business cycle. Those who deviate from these principles often learn harsh lessons when faced with adversity.