Corporate bankruptcies are on the rise, hitting levels last seen during the COVID-19 pandemic and the global financial crisis of 2008–09.
According to a recent report from credit-rating agency Standard & Poor’s, 75 new corporate bankruptcies were filed in the month of June, indicating an acceleration of filings from already high rates in 2023.
In addition, the agency reported, the 346 bankruptcy filings in the first half of this year exceeded the number for any six-month period over the past 13 years. The agency attributed the increase to higher interest rates, lingering supply-chain issues, and reduced consumer spending.
Companies are finding it harder to stay open in today’s high-rate climate, says Jonathan Carson, co-CEO at Stretto, a bankruptcy technology and case-management services firm.
“Rising interest rates have been the cause of a lot of businesses finding it more difficult to stay open when debt service goes higher and margins are thin,” Carson told The Epoch Times.
Filings were concentrated in consumer-discretionary, health care, industrial, and information technology sectors, and most filings were small to mid-size companies. On the positive side, nearly two-thirds of the bankruptcy filings were reorganizations, meaning that the companies intended to restructure their debts, emerge from bankruptcy, and continue operating.
Of the 346 corporate filings so far this year, 223 were reorganizations and 123 were liquidations in which all company assets were to be sold off to repay creditors, S&P stated. Between 2010 and 2023, 51 percent of bankruptcy filings hoped to emerge from the process.
Small businesses, which represent much of the U.S. economy, are going through more than just higher interest rates, Carson noted. The challenges that smaller firms are grappling with in the current landscape are falling consumer demand, higher labor costs, and input pressures.
“Most of America is that three-location restaurant or the auto body shop that all of a sudden has a lot of debt and payments. That’s hard, and they just can’t make it,” he said. “So that’s a very different place than the lawyers and investment bankers who represent the Neiman Marcus’s of the world.”
Even century-old companies cannot escape bankruptcy realities.
Conn’s HomePlus, a 134-year-old home goods retailer located in 15 states, for example, filed for Chapter 11 bankruptcy on July 25 and is poised to shutter 71 of its 170 stores. The company holds nearly $2 billion in debts to 25,000 creditors.
Looking ahead, Joseph Drupps, a central partner at Drupps Ventures, believes bankruptcies will stabilize in the coming years amid a time when the Federal Reserve could lower interest rates.
“[Bankruptcies] should be equal or less than this year, and then as interest rates fall, it’s usually a positive,” Drupps told The Epoch Times.
Consumer Discretionary Companies Hit Hardest
Consumer discretionary companies, which comprised the largest percentage of bankruptcy filings, are companies that rely on personal spending but that buyers don’t necessarily need at any given time, such as appliances, restaurants, high-end apparel, entertainment and leisure activities, and cars. The fact that this was the sector most heavily impacted may indicate that Americans are becoming more cautious about their spending, where they have a choice.
A June research report by Bank of America titled “The Kids Are Alright (for Now)“ stated that consumer spending was ”soft but stable.” Looking at the bank’s internal credit card-spending data, the report found that card spending increased by 0.7 percent year over year in May, down from a 1 percent increase in April.
There were some generational gaps, Bank of America reported, which may offer insights into the life stages of different generations in the United States.
The share of discretionary spending by Generation Z and younger millennials declined, “potentially due to increased spending commitments as they get older,” as well as higher costs for non-discretionary items, although on average, younger Americans enjoyed an increase in after-tax wages, the bank reported. Gen Z and younger millennials accounted for 30 percent of consumer spending in 2022.
This is likely an indication of younger generations growing up and taking on responsibilities for things such as buying homes and paying mortgages, perhaps spending less on nonessential products, travel, entertainment, and dining out. Spending by baby boomers, meanwhile, was boosted by the 2023 cost-of-living increase for Social Security payments to retirees, Bank of America reported. That generation is now seeing its youngest cohort enter retirement.
Generation X, which accounted for 34 percent of consumer spending in 2022, was “the weakest” of all generations in terms of spending and the only generation to experience negative spending growth in May, due to higher costs in non-discretionary areas such as property insurance and weaker wage growth for a generation in mid-life.
According to the U.S. Bureau of Economic Analysis, overall personal income for all Americans increased by 0.2 percent in June; while disposable income after taxes increased by 0.2 percent and personal consumption spending increased by 0.3 percent.
Personal Finances ‘Pretty Ugly’
While business bankruptcies are garnering attention, struggling consumers are facing bankruptcy challenges, too.
This year, the weekly average of personal bankruptcy filings is more than 9,400. This is up by nearly 10 percent over the 2023 average and a roughly 24 percent jump from the 2022 average, according to statistics released by BankruptcyWatch.
“The consumer balance sheet in America does not look very pretty. It’s actually pretty ugly,” Carson said, citing high credit card, mortgage, and student loan debt.
According to the Federal Reserve Bank of New York’s first-quarter Household Debt and Credit Report, household debt balances rose by $184 billion, to $17.69 trillion. At the end of March, credit card debt was above $1.11 trillion, mortgage balance totals were $12.44 trillion, and student loan debt was nearly $1.6 trillion.
Staff economists have observed growing delinquency rates for all debt types.
“Annualized, approximately 8.9 percent of credit card balances and 7.9 percent of auto loans transitioned into delinquency,” they wrote. “Delinquency transition rates for mortgages increased by 0.3 percentage points, yet remain low by historical standards.”
