The United States saw a significant jump in bankruptcy filings in 2023, with an overall increase of 18%, according to Reuters. This rise it is largely due to a combination of several economic factors, primarily post-pandemic economic changes and rising interest rates. Consumer bankruptcy filings mirrored this trend with identical growth of 18%, indicative of the broad impact across sectors.
Contributing economic factors
Economic downturn and high interest rates: An economic downturn combined with high interest rates and inflation is the main driver behind the increase in bankruptcy filings. The low interest rate environment of the previous years encouraged widespread borrowing and risk-taking, leading to financial stress as the economic landscape changed.
Tighter lending standards and pandemic-era safeguards: Growth also resulted from tighter lending standards and the phasing out of pandemic-era financial safeguards. These changes put additional pressure on companies and individuals struggling with debt repayment and financial restructuring.
Long-Term Effects of the COVID-19 Pandemic: The long-term effects of the pandemic, including economic uncertainty and job losses, have led to an increase in personal debt, further exacerbating the bankruptcy situation.
Impact on the financial sector
Corporate bankruptcy filings: The financial sector, in particular, has seen a significant increase in corporate bankruptcy filings. For example, SVB Financial Group’s Chapter 11 bankruptcy filing marked an industry milestone, representing the largest corporate bankruptcy filing in the financial sector of the year, with over $3.3 billion in unsecured claims.
Other notable bankruptcies: In addition, other regional banks and financial institutions, such as GloriFi and cryptocurrency lender Genesis Global Holdco LLC, have also filed for bankruptcy, indicating the extent of financial stress in the sector.
Historical context: Since 2010, there have been 13 financial bankruptcies with over $1 billion in liabilities at the time of filing. This historical perspective underscores the significance of the recent surge in bankruptcy filings.
Expectations for 2024
Continued Increase in Bankruptcy Filings: The number of bankruptcy cases is expected to continue to grow in 2024. This is due in part to the end of the pandemic stimulus, continued high interest rates and rising delinquency rates. Retail Sector Vulnerability: The retail sector may continue to lead US bankruptcies in 2024, largely due to persistent inflation and high interest rates. However, there is an expectation of some relief with monetary policy easing expected. Comparison to pre-pandemic levels: Despite the expected increase, there is still some way to go before reaching the peak of 757,816 bankruptcies filed in 2019, the year before the pandemic hit. This suggests that despite the increase in bankruptcy filings, they have not yet reached the heights seen in recent years.
Image source: Shutterstock