Commercial bankruptcy filings in the United States are experiencing an upward trajectory, with notable companies such as Bed Bath & Beyond, Silicon Valley Bank, and Party City succumbing to financial distress. However, while these developments raise concerns, a broader examination reveals a nuanced perspective on the economic landscape.
According to Epiq Bankruptcy, a provider of US bankruptcy filing data, August witnessed a total of 2,328 bankruptcy filings, marking a 14% increase compared to the same month in 2022 and a substantial 17% rise over July. This trend is also evident in the annual figures, with the US bankruptcy court reporting a total of 15,724 bankruptcies in the fiscal year ending June 30, 2023—an alarming 23% surge over the preceding year.
The causal factors behind this phenomenon are multifaceted. Exhaustion of pandemic relief funds, persistent inflation, a global economic slowdown, and the surge in capital costs, which have reached unprecedented levels in decades, are among the contributors. Furthermore, the US business community is grappling with the repercussions of interest rates, which stood at a mere 3.25% just 18 months ago but have since skyrocketed to 8.5%. This rapid escalation presents mounting challenges in terms of debt servicing and accessibility, a concern I cautioned about last year.
However, it is essential not to succumb to undue alarm. While bankruptcy rates are indeed on the rise and warrant attention, they remain notably distant from the levels witnessed during the Great Recession and prior economic downturns. As per data from the US court system, this fiscal year’s tally of 15,724 commercial bankruptcy filings pales in comparison to 2019—an economically prosperous, pre-pandemic year—when bankruptcy cases reached 22,483.
The high-profile corporate bankruptcies that have captured headlines should not be seen as entirely surprising. Silicon Valley Bank’s imprudent investment in treasuries as interest rates were ascending reflects a strategic blunder that economists at any level could have foreseen. Bed Bath & Beyond has faced competition from online retailers offering their products at more competitive prices, and Party City’s fortunes have been dimmed in a year marked by subdued celebrations.
While the occurrence of bankruptcy is undoubtedly lamentable, it’s worth noting that unemployment rates remain low, the economy continues its expansion, entrepreneurial activities have surged, and ample opportunities persist for displaced workers to secure new employment—though the specter of automation looms. The closure of any business has ripple effects on real estate, local communities, and the ecosystem of small businesses that support it.
A silver lining in this situation is the Small Business Reorganization Act, which permits businesses with debts under $7.5 million to initiate a bankruptcy reorganization under Subchapter V of the bankruptcy code. This legislation streamlines procedures for smaller companies, facilitating a quicker and more accessible path to reorganization and recovery.
Bankruptcy, while often viewed as a setback, can also serve as a cleansing process. In the aftermath of previous economic crises, we have witnessed a rationalization of industries, elimination of poorly managed establishments, and a renewed focus on fiscal prudence. Those businesses that survive adversity tend to exhibit sound financial management, prudent investment practices, and an aversion to the pitfalls of irrational exuberance.
In essence, it is these resilient enterprises that navigate turbulent times successfully. They prioritize savings, make judicious investments, manage their cash reserves prudently, avoid succumbing to hype, and exercise fiscal restraint during periods of prosperity, recognizing the inevitability of economic cycles. Those who do not heed these lessons face harsh consequences when the economic winds shift.
While these bankruptcies may be painful for those directly impacted, the broader economy remains resilient, poised to adapt and rebound.