Bankruptcy filings in the United States have seen a significant increase in the past year, affecting both individuals and businesses. According to the Administrative Office of the U.S. Courts, there were a total of 486,613 bankruptcy filings in the year ending June 2024, a 16.2 percent jump from the previous year’s 418,724 cases. While personal bankruptcy filings increased by over 15 percent, business filings saw a staggering increase of over 40 percent. This upward trend has continued for every quarter since June 2022.
Various reasons have been cited for the surge in bankruptcies among businesses. Some retailers, such as Rue21, attributed their bankruptcy filings to “inflation and macroeconomic headwinds,” while others, like Stop & Shop, pointed to “underperforming stores.” Bob’s Stores, based in Connecticut, struggled to secure the necessary finances to sustain its operations. These challenges are further compounded by high interest rates, which make financing costs expensive for businesses. Additionally, companies face the dilemma of dealing with high production costs while trying to remain competitive in the market.
Amy Quackenboss, the executive director at the American Bankruptcy Institute (ABI), believes that the continuous increase in bankruptcy filings indicates a growing economic strain on businesses and households. Michael Hunter, vice president of bankruptcy data provider Epiq AACER, anticipates a strong demand for individual bankruptcy filings, especially considering the surge in commercial filings, high consumer debt levels, elevated interest rates, and overall increased costs despite relatively flat household income.
Interestingly, despite the rising number of bankruptcies, many businesses remain optimistic about the future. The U.S. Chamber of Commerce’s Small Business Index for Q2, 2024, indicates that businesses have plans to increase staff and investment. Revenue expectations for the next year have reached record levels in the survey. More than 70 percent of respondents expect revenue increases, regardless of business size or sector. Younger businesses, those in operation for less than 10 years, display greater optimism regarding future hiring and increased investments compared to more established businesses.
However, the optimism among businesses contrasts starkly with the reality of layoffs experienced by hundreds of thousands of workers in 2024. Challenger, Gray & Christmas, Inc., an outplacement firm, reported that U.S. firms announced plans to cut 434,645 jobs this year. Technology firms led the pack in announcing layoffs, followed by the education industry, transportation sector, and consumer product companies. The primary reasons cited for these layoffs were cost-cutting measures and unfavorable market and economic conditions.
The majority of corporate bankruptcy filings tracked by S&P Global in the first half of the year were categorized as reorganizations. This refers to the process of overhauling troubled businesses to make them profitable again. S&P Global attributes this trend to higher interest rates and supply chain issues, which have made it difficult for firms to maintain sufficient cash flow to pay off debt and prevent loan defaults. With relief from higher interest rates expected to take several more months, companies may turn to reorganization as a means of finding firmer financial footing.
The U.S. Federal Reserve’s decision to keep interest rates unchanged at 5.25-5.50 percent since July of the previous year has put added strain on businesses. The expectation of rate cuts earlier this year did not materialize, leaving companies to continue paying higher interest on loans, leading to financial difficulties. Fed Chair Jerome Powell has warned that higher interest rates for an extended period could weaken economic activity and employment. Concerns about further rate hikes linger as Fed officials have suggested that they might raise rates if inflation remains elevated. The upcoming Fed meeting scheduled for July 30 and 31 is not anticipated to result in rate cuts, with traders expecting them to occur in September, according to data from the CME FedWatch tool.
