Yes, bankruptcies are on the rise in the US — but there’s no need to panic

There are still positive trends amid this current downturn

(This column originally appeared in The Guardian)

Commercial bankruptcy filings are rising. Big-name companies including Bed Bath & Beyond, Silicon Valley Bank and Party City have all folded — and it looks like there are more to come.

According to Epiq Bankruptcy, a provider of US bankruptcy filing data, reported earlier this month that there were a total of 2,328 bankruptcy filings this past August, a 14% increase from the same month in 2022 and a 17% increase over July. The US Bankruptcy court reported a total of 15,724 bankruptcies in the fiscal year ended 30 June 2023, a 23% increase over the prior year.

Does any of this come as a surprise? Not really. Pandemic funds have run out, inflation remains sticky, the world’s economy has been running slower this year and the cost of capital is the highest it’s been in decades. Also American businesses are only starting to feel the effects of a prime interest that was as low as 3.25% just 18 months ago and is now at 8.5%. This unprecedented increase in such a short amount of time is making debt maintenance and availability all the more difficult. I warned about this last year.

But let’s not panic.

Even though bankruptcy rates are higher than in previous years and are growing, they are still nowhere near the levels we saw during the Great Recession or other recessions before it. According to the US court system, this fiscal year’s total of 15,724 commercial bankruptcy filings is still significantly less than 2019 — a booming, pre-pandemic year — when bankruptcies were at 22,483.

And do any of the big corporate bankruptcies come as a big surprise? Silicon Valley Bank notoriously (and insanely) wrapped up their cash in treasuries as interest rates were going up, a move any Econ 101 student could tell you would lead to disaster. Bed Bath & Beyond’s products could be purchased for less online and, with apologies to Party City, no one’s in the mood to party this year.

Of course, bankruptcy is not good news. But unemployment is still low, the economy is still growing, entrepreneurism is sharply up and there are plenty of opportunities for displaced workers to find re-employment… … at least until AI completely eliminates their jobs. The loss of any business has indirect impacts on real estate, a community and all the small businesses that serve it.

One bright spot: if your small business is in this unfortunate situation, and you’ve got debts of less than $7.5m, then you’re eligible to file for a bankruptcy reorganization under Subchapter V of the bankruptcy code. Known as the Small Business Reorganization Act, the legislation reduces the level of red tape required for smaller companies and makes it easier and quicker to reorganize and hopefully get a fresh start.

But as bad as a bankruptcy is, it’s also a way of cleaning house.

Back in 2010 there were literally 20 nail salons within a baseball’s throw of my home. After the recession that number came down to a reasonable level. Restaurants that were poorly managed went belly up. Dumb retail stores selling dumb products found that people were smarter about their money when they had less of it. Crooks and criminals were revealed when funds became tight, leaving them with fewer options to Ponzi their money. Stocks that were overvalued came back to earth.

The business owners that I know who survive bad times and recessions and don’t go bankrupt are not these people. They are generally good at what they do. They save. They invest wisely. They manage their cash prudently. They don’t get caught up in hype and they don’t overspend when things are booming because they know there’s always a downturn around the corner. The ones who don’t do this learn a hard lesson when the chips are down.

These are the people going bankrupt. I’m sure they’ll be fine. I know the rest of us will.

Originally published at https://www.theguardian.com on September 17, 2023.