US Bankruptcies Among Companies Have Fallen by 43.1% Since 2020
According to a MoneyTransfers analysis, the number of American companies filing for bankruptcy has declined since 2020. The site has presented data showing the number of American companies filing for chapter 11 in Q1 2020 was 23,114. These have shrunk to 13,160 by the end of Q1 2022. That’s a 43.1% decrease in the number of such applications.
Jonathan Merry is MoneyTransfers’ CEO and has been discussing these bankruptcy figures. He attributes this drop to the federal government’s interventions to cushion the economy from the pandemic’s ravages. Washington announced a raft of stimulus measures to protect American businesses at the onset of the epidemic.
The federal government unveiled the March 2020 CARES Act to protect businesses from the adverse effects of COVID-19. Likewise, it initiated The Paycheck Protection Program that helped many small businesses to stay afloat. These and the near-zero interest rates were pivotal in pushing the filings down.Jonathan Merry
Could Other Factors Be The Reasons Behind The Low Filings?
While reports of declining bankruptcy may sound like good news, some experts aren’t celebrating yet. They caution that this supposed decline may not indicate improved financial health. Instead, they say, it may be due to other underlying factors, and it’s essential to understand them.
Changes in Court Operations
For instance, the American Bar Association (ABA) holds that changes in court operations resulting from the pandemic could have led to depressed filings. The COVID-19 mitigation measures may have hampered access to courts and legal representations hence the decline.
Again the association holds that a busy court schedule could have prevented smaller businesses from filing their applications. That’s because courts with higher caseloads tend to prioritize larger companies.
It also suggests that bankruptcy fees may have hindered some businesses from filing for Chapter 11. ABA mentions a study that found a correlation between the provision of tax rebates and the filing for bankruptcy.
This theory explains the spike in Chapter 7 filings following the disbursement of the first stimulus funds in April 2020. However, the subsequent disbursements in December 2020 and March 2021 didn’t see an uptick in those filings.
The COVID-19 Uncertainty
Finally, another possible reason for the recent decline in bankruptcy filings could be the uncertainty surrounding the COVID-19 pandemic. Some players may have adopted a wait-and-see attitude to determine the pervasiveness of the situation before filing for bankruptcy.
This hypothesis explains why small businesses had low filing rates experienced by smaller companies but would also predict an increase in them should the COVID-induced uncertainty dissipate.
Not Out Of The Woods Yet
While the global economy has begun to recover from the shocks of the pandemic, the danger has not passed. Stimulus packages have bought distressed firms some extra time. But they could be masking deeper frailties of businesses, especially in EMDEs.
The World Bank has reported an upsurge in financial risks globally since the pandemic’s onset. That increase is due to businesses borrowing to manage their liquidity gaps. This borrowing has coincided with declines in company earnings putting pressure on their debt servicing abilities.
At the same time, the Coronavirus crisis has altered consumer behavior which could challenge the sustainability of some businesses when the crisis passes. For many businesses, the risk of bankruptcy remains high, and policymakers must remain vigilant to avoid such an ending.