There’s a lot of talk these days about increasing commercial bankruptcy filings. Some say it’s a sign of a struggling economy, while others believe it’s just a natural part of the business cycle. Whatever the reason, if your business is facing financial trouble, you’re probably feeling a lot of stress. You might even be embarrassed to talk about it. I understand how overwhelming and confusing it can feel, so let’s explore some reasons for this recent uptick in commercial bankruptcy filings. I’ll also shed some light on common factors behind business bankruptcies and what your options might be.
Reasons for the Rise in Commercial Bankruptcy Filings
In recent months, the increase in commercial bankruptcy filings has been widely reported. You’ll learn more about the numbers later in this post, but why is this happening? One factor is judicial vacancies, which can impact court operations and create delays in case proceedings. Another factor is the availability of bankruptcy analytics, which provide insights into industry trends and financial distress.
Economic Uncertainty
It’s no secret that the economy has been unstable for a while. Inflation is causing prices to go up, which can squeeze profit margins for businesses. Increased interest rates make borrowing more expensive, impacting businesses with existing loans or needing additional funding. Many economists predict a recession is on the horizon.
This economic uncertainty makes businesses less likely to invest and expand. In turn, this contributes to their financial troubles. Additionally, businesses may need to navigate the complexities of the bankruptcy court system, including filing the necessary bankruptcy forms and understanding the role of the federal judge.
Lingering Effects of the Pandemic
While most pandemic-related restrictions are a thing of the past, their impact on businesses hasn’t fully subsided. Businesses in specific industries such as tourism and hospitality experienced long-term setbacks. These setbacks continue to make recovery challenging.
Supply chain disruptions are another ongoing issue that creates challenges for many companies. The pandemic also highlighted the importance of public access to court records and the role of electronic public access in ensuring transparency.
Debt Accumulation
Businesses may accumulate debt for various reasons. For example, perhaps the business needs additional funding to cover expenses, invest in growth, or handle unexpected challenges. The current economic climate, characterized by factors such as high-interest rates and reduced consumer spending, can exacerbate debt accumulation for businesses.
If revenue decreases or fails to keep pace with debt payments, things can spiral out of control quickly. In some cases, seeking assistance from a federal court interpreter or utilizing pretrial services can help businesses navigate legal and financial challenges. However, it’s essential to address debt accumulation proactively to avoid more severe consequences.
Recent Commercial Bankruptcy Filing Statistics
So, you probably want to know the actual numbers regarding this uptick in commercial bankruptcy filings. Well, according to a September 2024 report by the American Bankruptcy Institute (ABI) and Epiq Bankruptcy, overall commercial bankruptcy filings went up 8% in August 2024. This means 2,562 businesses filed for bankruptcy in August compared to 2,358 businesses in August of the previous year.
However, the ABI did note a 3% decrease in larger corporations opting to restructure their debts through Chapter 11 in August 2024 compared to August 2023. The report defines larger corporations as businesses with debts over $3 million. ABI reports these large corporations made up 616 of all filings in August 2024 compared to 635 in the previous August.
What’s Behind These Recent Filing Statistics?
Michael Hunter, Vice President of Epiq AACER, suggests, “As delinquency rates increase in many domains, debt levels continue to grow, high-interest rates remain intact with relatively flat household income, we expect continued increases in new filing volumes this fall and into the winter of 2024.”1 Basically, higher interest rates, higher debt levels, and higher delinquency rates in several industries combined with stagnant wages likely mean an increase in commercial bankruptcy filings will likely continue.
The data shows we’ve already seen an upward trend this year, with filings jumping up 16% between March 2023 and March 2024.2 This trend highlights the importance of the federal judiciary in addressing the legal and economic challenges faced by businesses.
Impact of Reduced Eligibility for Subchapter V Bankruptcy Relief
The American Bankruptcy Institute (ABI) noted a potentially concerning trend regarding the recent decrease in Chapter 11 filings. While fewer large corporations are filing for Chapter 11 bankruptcy, those that do are smaller in terms of asset size. In the first half of 2024, the average assets of companies filing for Chapter 11 dropped to $510 million, down from $858 million in the previous half-year period. This suggests that increasing bankruptcy filings are concentrated among smaller businesses.
This trend appears connected to changes in bankruptcy relief options under the U.S. Bankruptcy Code. Businesses with debts under $7.5 million could previously use Subchapter V of Chapter 11 for a streamlined restructuring process. However, as of June 21, 2024, eligibility was reduced to businesses with debts under $3,024,725 due to a statutory sunset. Prior to this, Subchapter V filings surged 66% from the same period the year before, but following the sunset, they rose by just 4.5%. Companies with higher debt loads still have access to Chapter 11, but it is a more expensive and complex process compared to Subchapter V. This shift, particularly post-June 2024, suggests that smaller businesses are increasingly turning to bankruptcy relief, with fewer options available under Subchapter V’s reduced eligibility limits.
| Metric | 2020 (Pandemic) | 2021 | 2022 | 2023 | 2H 2023-1H 2024 | 1H 2024 (Subchapter V Sunset on June 21st) |
|---|---|---|---|---|---|---|
| Chapter 11 Bankruptcies (total) | 106 | 55 | 37 | 98 | 108 | 60 |
| Chapter 11 Mega Bankruptcies | 56 | 23 | 25 | 28 | 24 | 16 |
| Average Asset Values (Billions) | $3.58 | $1.81 | $1.14 | $1.16 | $0.67 | $0.51 |
Factors Contributing to Business Bankruptcies
While broader economic factors like recessions or inflation play a big role in the financial stability of a company, several factors under the control of business owners and executives often contribute to bankruptcy. The increasing prevalence of class action lawsuits and mass tort litigations can pose significant financial challenges for businesses, potentially contributing to bankruptcy filings. Here are some key examples:
Poor Financial Management
Failing to monitor cash flow, plan for unexpected events, manage debt effectively, and budget appropriately can lead to instability for any company, large or small. When combined with tough economic conditions, companies already mismanaging their finances will struggle even more. Additionally, inadequate financial disclosure, as required by judiciary financial disclosure reports, can have serious consequences.
Inadequate Sales
Sometimes companies struggle to maintain the sales needed to keep things afloat. Maybe their sales strategy wasn’t well executed. Or, there could be factors outside of their control like increased competition in the marketplace or shifts in consumer spending patterns. For instance, Cornerstone Research noted that many retailers experiencing recent financial struggles report decreased revenue tied to an overall shift in how consumers shop, as they increasingly choose to do so online.6
Operational Inefficiency
In a tough market, businesses need to operate as efficiently as possible to make sure they’re keeping unnecessary expenses down. Sometimes a lack of modern business processes, trained workers, proper infrastructure, or efficient technology gets in the way of companies getting this done. A well-defined long-range plan can guide businesses in optimizing their operations and improving efficiency. This involves setting clear goals and objectives and aligning resources and efforts to achieve them.
Unfortunately, if costs exceed revenue, businesses are likely to end up in deep water. The Northern District of California, known for its expertise in technology-related cases, has seen its fair share of bankruptcy filings from companies facing operational challenges. Businesses operating in this district, often at the forefront of innovation, must adapt quickly to the ever-changing technological landscape to remain competitive.
Overexpansion
Some companies make bad decisions about growth or expand too quickly before they are fully prepared. When they’re not ready, that expansion eats up needed resources. This results in mounting costs they’re unable to handle. Overexpansion can strain a company’s financial resources, making it difficult to meet debt obligations and cover operating expenses. Overexpansion can create a precarious position that might make filing for bankruptcy necessary to save the company.
Seeking Legal Counsel if Faced With Possible Business Bankruptcy
You must consult with an attorney if your company is experiencing serious financial distress that threatens your ability to keep your doors open. I recommend this because your attorney can help you explore options to address your financial difficulties and determine if bankruptcy might be a viable option for your situation. When facing potential bankruptcy, seeking legal counsel is essential to understand the implications of federal rules and procedures. It is advisable to consult with an attorney experienced in bankruptcy law to guide you through the process.
Bankruptcy isn’t the only possible solution to address mounting business debts. Some alternatives to explore are loan modifications, negotiating with creditors to change repayment terms, out-of-court workouts, and even possibly assignments for the benefit of creditors (ABCs). Ultimately, when it comes to increasing commercial bankruptcy filings, understanding the possible reasons for these trends will hopefully help businesses be more proactive to avoid similar outcomes. However, if your company ends up in such a situation, legal counsel is imperative for identifying available options. Engaging legal counsel early in the process can help businesses explore all available avenues and make informed decisions.
FAQs About Commercial Bankruptcy Filings Increase
Are corporate bankruptcies increasing?
Yes, the trend as of late 2024 shows an increase in commercial bankruptcy filings overall, although bankruptcies filed by larger corporations, typically defined as those with over $3 million in debt, did decrease this past August compared to the previous year. However, bankruptcies among small to mid-size businesses increased during the same period. Much of this is thought to be related to reduced access to bankruptcy relief available under the U.S. Bankruptcy Code via Subchapter V since eligibility was lowered to companies with under $3 million of debt in June 2024. It’s worth noting that the Southern District of New York, a hub for financial institutions, often handles complex corporate restructuring cases.
Are business bankruptcies up?
As of September 2024, data shows that commercial bankruptcy filings are increasing. It’s thought to be tied to the current economic climate and tighter restrictions on eligibility for certain types of bankruptcy relief for smaller businesses. Businesses considering filing for bankruptcy should be aware of the court fees associated with the process and factor them into their decision-making. Additionally, it’s important to understand the potential impact of bankruptcy on future business endeavors.
Have bankruptcies increased?
Both commercial bankruptcy filings and those for individuals, which primarily consist of Chapter 7 and Chapter 13 bankruptcies, increased. August 2024 statistics show an 8% jump in both business bankruptcies and filings by individuals. Data shows overall bankruptcies jumped up about 16% since this time last year. Individuals and businesses facing financial distress may consider exploring defender services or other forms of legal aid to protect their rights and interests. It’s crucial to consult with a qualified attorney to understand the available options.
Did business bankruptcies jump 34 percent in the first half of 2024?
No, while commercial bankruptcy filings did increase in the first half of 2024, available data doesn’t indicate a jump as high as 34%. According to a study by Cornerstone Research that tracked trends in filings by both private and public companies with assets over $100 million, Chapter 11 filings, the primary type filed by large corporations, rose from 53 filings in the last half of 2023 to 60 in the first half of 2024, about a 13% increase.7 However, this trend appears to have reversed as of August 2024. Data suggests the number of larger corporate bankruptcy filings did go down, but that the filings increasingly involved companies with smaller overall assets, pointing towards more bankruptcies amongst small businesses compared to larger corporations.
Conclusion
There are many possible reasons for the recent rise in commercial bankruptcy filings. Businesses, big or small, may find themselves overwhelmed by economic difficulties outside their control, such as rising costs, inflation, increased interest rates, supply chain problems, labor shortages, or competition from online marketplaces. Internal factors, such as poor money management or operational inefficiencies, may also cause problems. But whatever the reason, if you’re worried about the financial health of your business, please know that you’re not alone, and help is available. Speaking with an experienced legal professional will help you better understand your options, especially as it pertains to whether or not pursuing bankruptcy protection might be a good solution for your specific circumstances.
