Commercial bankruptcy down; operational problems may change that

Business bankruptcies skyrocketed during 2020, but they are at historically low rates this year. According to the Administrative Office of the U.S. Courts, filings for the fiscal year ending on June 30 were at their lowest point since 1985. They were down 17.7% compared with FY 2020. The average dollar amount of corporate bankruptcies is down, as well.

Experts say that many businesses may have been saved from Chapter 11 by federal relief efforts – but that could be about to change. Operational problems, supply chain interruptions and questionable deals may be ready to drive commercial bankruptcies up again.

Financing more available, creditors more hesitant

The markets have been extremely volatile over the course of the pandemic, with many businesses finding themselves dead in the water, while others seeming to find the necessary formula for success.

Among those who have found a way to succeed, their pathway to success may have come because the sustained strength of capital markets made it easier to find financing, according to Reuters. Perhaps with government programs allowing some breathing room, stricken businesses have had time to make structural changes that they couldn’t ordinarily have made without significant interruption.

One expert interviewed by Reuters said that may businesses have implemented layoffs and other cost-cutting measures that would usually have caused bad publicity and tense relations with employees.

Creditors, in the meantime, have eased up on collecting from many companies that are fundamentally sound, outside of the effects of the pandemic. They don’t want to own debtor businesses, so they’re being more flexible. In some cases, they may extend debts or seek more collateral rather than attempting to foreclose.

Unfortunately, some investors may be choosing questionable investments because they’re the only ones offering a promise of decent returns. If those questionable investments end up going south, we could see increases in business bankruptcy filings next year or in 2023.

Is your company considering a Chapter 11 reorganization?

Many companies are in the position of having excessive, unmanageable debt, even if they are able to get the funding to keep themselves afloat for now. But that funding won’t last forever, and creditors won’t hold out forever, either.

If your company needs to reorganize and shed some debt, don’t be afraid of Chapter 11 bankruptcy. An experienced law firm can help you determine if bankruptcy is necessary and come up with a solid plan for meeting your obligations as you work to put your business on a more favorable financial footing.