In August, there was a significant increase in corporate bankruptcies, with a 17% rise from July, according to data company Epiq Bankruptcy. This upward trend in corporate bankruptcy has been ongoing for more than a year now, and experts in the field have anticipated this development for quite some time.
Ed Morrison, a professor at Columbia Law School, explains that the current increase in bankruptcies is a direct result of decisions made in the 2010s. Following the 2008 financial crisis, borrowing money became more affordable, allowing unstable companies to stay afloat. The pandemic further exacerbated this situation as interest rates dropped again and relief programs extended the lifelines of struggling businesses.
Now, the consequences of these factors have materialized as bankruptcies have accumulated. However, Morrison clarifies that these failures do not necessarily indicate widespread economic problems. Nevertheless, they can have devastating effects on the affected companies and their stakeholders.
Sam Antill, a finance professor at Harvard Business School, adds that during times of high bankruptcy rates, finding buyers for distressed companies becomes more difficult. This is particularly evident in the healthcare sector, where many senior care, pharma, and hospital companies have filed for bankruptcy this year. The repercussions of this include limited choices for consumers and a higher likelihood of job loss for workers.
David Wessel, a senior fellow at the Brookings Institution, suggests that these bankruptcies are partially a result of the Federal Reserve’s attempts to slow down the economy. He emphasizes the delicate balance required in this process, as too much cooling could have negative consequences such as banks tightening their lending. This is especially detrimental to small businesses, which make up the majority of American businesses.
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