Are More Business Bankruptcies Expected in the Near Future? Trends and Contributing Factors

Are More Business Bankruptcies Expected in the Near Future? Trends and Contributing Factors

by Kylie Ora Lobell, July 2014

When the Great Recession hit the United States, businesses were filing bankruptcy left and right. The government handled some of the biggest corporate bankruptcy cases it had ever seen. Now that the economy is recovering, fewer businesses have been forced to file.

According to Becky Yerak of the Chicago Tribune, as of May of this year, 25 public companies in the United States worth $56 billion in assets filed for either chapter 7 or chapter 11 bankruptcy. In 2013, during the same period, there were 33 filings and $21 billion in assets reported. Though the amount of assets is higher, it’s heavily weighed down by Energy Future Holdings, a Dallas-based electric utility company that had claimed $40 billion.

Historically, Yerak writes that bankruptcy filings come in spurts. This is evidenced by the fact that in March and April, 11 companies carrying at least $300 million in assets each filed for chapter 11 bankruptcy protection. Some speculate that though the numbers are low now, there is always another rush of business bankruptcies on the horizon.

Why More Business Bankruptcies Could Occur

Government regulations and mandated low interest rates have been able to sustain failing businesses. After 2007, when the economy took a downward turn, the federal government proceeded to lower the interest rate. That way, a bigger financial disaster could be avoided. According to the Board of Governors of the Federal Reserve System website, “Low interest rates help households and businesses finance new spending and help support the prices of many other assets, such as stocks and houses.”

Eventually, after the government sees an improvement in the economy, an uptick of business bankruptcy filing will inevitably occur. Yarek cites Brian Shaw, a lawyer in Chicago, who said that when cheap money ceases to exist, and interest rates increase, some businesses might not be able to pay back their loans.

According to Emily Glazer of The Wall Street Journal and Rob Jordan, a credit analyst at Epiq Systems Inc., right now, “the availability of cheap credit has led companies to opt for out-of-court restructurings, which can save money, time and mitigate creditor concerns.”

Businesses would rather turn to lenders to save themselves than file bankruptcy, which is costly and time consuming, writes The Wall Street Journal’s Joseph Checkler. However, citing Z Capital Management’s Christopher Kipley, he says that “bankruptcy or not, the number of companies with overleveraged balance sheets is growing, and a distressed cycle may not be as far away like some have said.”

If these companies aren’t able to pay back their loans from investors, who are seeking out big returns, they might once again be in trouble. “Cheap credit” could end up hurting more than helping them.

The Southeast Takes the Biggest Hit

In the month of March 2014, the Southeast saw a huge number of business bankruptcies filed in Florida, Alabama, and Georgia, according to statistics from the U.S. Bankruptcy Courts. The total number of filings clocked in at 13,770, compared to only 2,897 total in Maine, Massachusetts, Rhode Island, Puerto Rico, and New Hampshire. Among all the states, chapter 7 was the most widely utilized filing. There were 66,227 filings of chapter 7, followed by 26,715 chapter 13 filings. In third was chapter 11, with 721 filings.

Why Chapter 7 and Chapter 11 Bankruptcy are Popular

While chapter 7 and chapter 11 bankruptcy are vastly different, they remain some of the most attractive options for businesses in need. Small businesses and sole proprietorships file for chapter 7 bankruptcy because it frees them from debt and stops creditors from knocking on their doors.

According to Fox Business, every asset is liquidated and a trustee figures out the debt repayment plan in a chapter 7 filing. It is cheaper than other bankruptcy options, and allows a person to walk away from his or her business.

Larger corporations who want time to reorganize themselves mostly use chapter 11 bankruptcy. It is costly, sometimes totaling anywhere from $10,000 to more than $50,000, but gives businesses the chance to figure out their recovery strategy. It lets owners look at their past mistakes, and try to start over anew.