US Bankruptcies Jump 18% In 2023 Amid High Interest Rates

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by Tyler Durden
Friday, Jan 05, 2024 - 07:45 PM

Authored by Naveen Athrappully via The Epoch Times,

Overall bankruptcies in the United States jumped by almost a fifth in 2023 as both businesses and households struggled with high-interest rates and the end of pandemic stimulus.

Total U.S. bankruptcy filings rose by 18 percent to 445,186 last year, up from 378,390 filings in 2022, according to data from Epiq AACER, a provider of U.S. bankruptcy filing data. This includes both commercial and personal bankruptcy filings until the month of November. “As anticipated, we saw new filings in 2023 increase momentum over 2022 with a significant number of commercial filers leading the expected increase and normalization back to pre-pandemic bankruptcy volumes,” said Michael Hunter, vice president of Epiq AACER.

“We expect the increase in number of consumer and commercial filers seeking bankruptcy protection to continue in 2024 given the runoff of pandemic stimulus, increased cost of funds, higher interest rates, rising delinquency rates, and near historic levels of household debt.”

Overall commercial filings grew to 25,627 last year from the 21,479 registered in the previous year, an increase of 19 percent.

Commercial Chapter 11 filings rose from 3,819 to 6,569, an increase of 72 percent. Chapter 11 bankruptcy filings are made by companies to restructure debt and allow the businesses to retain assets while drafting a plan to pay back what they owe.

Personal bankruptcy filings rose 18 percent to 419,559 in 2023, with Chapter 13 filings increasing by 18 percent and Chapter 7 by 17 percent.

Chapter 13 is used by individuals to restructure their debts. A big benefit of Chapter 13 filing is that the individual’s home will not be at risk of foreclosure when the proceedings are underway. They can repay some debts in full and others in part. To qualify, the individual has to meet certain debt threshold conditions and must have regular income.

Chapter 7 allows filers to be exempt from certain debts while giving up some of their assets. Only individuals with incomes below their state’s median income can qualify.

Commenting on the higher bankruptcy filings, Amy Quackenboss, executive director of the American Bankruptcy Institute (ABI) said that “as interest rates remain elevated, increasing geopolitical tensions weigh on global supply chains and debt loads continue to grow, struggling businesses and families can turn to the proven process of bankruptcy for a financial fresh start.”

Loan interest rates for businesses and households have risen over the past two years due to the U.S. Federal Reserve’s rapid rate hikes. In late December 2021, the federal funds rate was around 0.7 percent, which has now grown to 5.33 percent.

Rising Bankruptcies

According to a report by S&P Global Market Intelligence, there were 591 corporate bankruptcy filings in 2023 until November, which is the highest for this period since 2020 and the second highest since 2010.

S&P’s bankruptcy tracker covers two types of businesses: (a) public or private firms with public debt who have assets and liabilities greater than or equal to $2 million at the time of bankruptcy, and (b) private companies with assets and liabilities greater than or equal to $10 million at the time of bankruptcy.

The consumer discretionary sector saw the most number of bankruptcy filings at 76, followed closely by industrials and health care at 75 each, financial at 34, and consumer staples at 23.

“The end of ultra-low interest rates that started in 2008, ushered in a resurgence of bankruptcy filings” but the trend could normalize going forward, Art Hogan, chief market strategist at B. Riley Wealth said in an interview with Reuters.

Amid a high-interest rate environment, companies are struggling to repay debts that are currently maturing.

“Retail will be a particularly hot sector next year [for bankruptcies]. … There are plenty of retailers that saw a boom in profit during the pandemic that have since dried up,” said Catherine Corey, global head of restructuring data at Debtwire.

In an interview with Business Insider in late November, Collin Martin, Charles Schwab director and fixed income strategist, estimated that borrowing costs for some businesses doubled or even almost tripled last year compared to the previous years. This has put financial pressure on firms.

“When corporations are managing their balance sheets and looking to issue or refinance debt, they have to issue debt with significantly higher yields than what they’ve seen over the past number of years, and that’s just a big hit to their earnings. It’s more interest they have to pay, which can affect their corporate profits in an environment where revenues are already slower,” he said.

As to personal bankruptcies, many Americans are now not in a good financial condition. According to data from the Federal Reserve Bank of New York, household debt hit a record $17.29 trillion in the third quarter of 2023.

While debt is high, the personal savings rate is at a low level. Data from the Federal Reserve Bank of St. Louis shows that the savings rate in November was 4.1 percent, lower than the pre-pandemic rate of 6.4 percent in December 2019.

It is also far lower than the very high savings rate seen during the pandemic—32 percent in April 2020 and 26.1 percent in March 2021.