Next Up: A Tsunami of Bankruptcy Filings Due to COVID Closures
While companies are struggling, we still haven't seen the expected flood of bankruptcies due to the downturn. But just like the water recedes before a tsunami, economic turmoil is definitely coming.
July 23, 2020 at 08:12 AM
6 minute read
The pandemic-prompted economic shutdown has devastated small businesses, taking a roaring economy down to a whimper in only a few short months. And while companies are struggling, we still haven't seen the expected flood of bankruptcies due to the downturn. But just like the water recedes before a tsunami, economic turmoil is definitely coming.
The New York Times recently reported that the enormous number of filings likely to hit over the coming months could overwhelm the courts working to rescue businesses worth saving in this worst economic downturn since the Great Depression. According to a National Bureau of Economic Research study, the number of active business owners in the country fell by 22%, from 15 million to 11.7 million between February and April. This compares to 5% or 730,000 business owners during the Great Recession. And the American Bankruptcy Institute reports a 48% increase in commercial Chapter 11 filings in May over 2019, although total commercial filings decreased 28%. I suspect the reason for the overall decrease is a result of federal and state pandemic-relief programs,shoring up more than 4.4 million small businesses in the Paycheck Protection Program (PPP) alone. U.S. court closures and diminished access to bankruptcy attorneys due to social distancing measures also may have contributed to the decline.
Looking ahead, I expect to see a considerable uptick in bankruptcy filings, particularly as government programs expire. Bankruptcy filings will start to rise in the late summer and continue surge upward through the fall. November and December filings will level off with the welcomed distraction of the holidays but will resurge intensely at the start of 2021. Next year will bear the brunt of the economic shockwave set off by the 2020 shutdown mixed with record-setting debt: we'll see a momentous increase in bankruptcies, as businesses navigate a world of increased debt and decreased profit.
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