Any remaining doubt as to whether the recent rise in business bankruptcies is a temporary blip or a bona fide trend with legs can probably be put to rest for good.
Most recently, there were 634 commercial Chapter 11 filings in August, a 54% leap from 411 such filings in August 2022, according to Epiq Bankruptcy, a provider of U.S. bankruptcy filing information, which released the new data last week.
It was the 13th consecutive month of year-over-year increases — and not only for total commercial Chapter 11 filings. Also seeing steady increases are small-business filings (for companies with less than $7.5 million in debt) under Subchapter V of Chapter 11, which were up 43% in August.
Epiq had previously reported commercial Chapter 11 filings jumped by 68% in the first six months of 2023, to a total of 2,793, compared with 1,776 in last year’s first half. (Even personal bankruptcies are up significantly this year, although companies are apparently faring worse than individuals, for whom bankruptcy filings increased by only 18% in August and 21% in the first half.)
As with many trends vexing companies these days, economic headwinds such as inflation and rising interest rates are the main culprits in the bankruptcy surge. The negative trend was widely expected, with companies not only trying to cope with increased debt loads but also facing tougher access to credit following the end of the federal government’s COVID-19 pandemic funding.
“Struggling companies looking to find their financial footing are increasingly turning to the established path of bankruptcy,” says Amy Quackenboss, executive director of the American Bankruptcy Institute, which partners with Epiq.
The increased incidence of bankruptcy came a couple of years later than most observers had initially expected.
“In 2020,” Quackenboss notes, “as the pandemic caused entire industries to shut down for a period of time, many believed the economy would suffer significantly. Thus, there was an anticipation that the U.S. would see a large uptick in bankruptcy filings from struggling companies. But, as a result of government relief programs, moratoriums, and lender deferments, the number of commercial bankruptcy filings was much less significant than expected.”
Now that the COVID-era relief programs and moratoriums have expired, don’t look for the rate of bankruptcy filings to fall much until the current economic pressures are alleviated, Quackenboss advises.
Commercial Chapter 11 bankruptcies were not only up sharply in August from the year-prior month, but skyrocketed 76% from the number registered in July of this year, according to Epiq. Small-business filings under Subchapter V rose 29% from July when there were 150 such filings.