Home Business Why Business Bankruptcy Rates Will Rise in the Near Future

Why Business Bankruptcy Rates Will Rise in the Near Future

The ability for businesses to turn a profit has been turned upside-down by coronavirus restrictions. When the economy was first shut down in early 2020, millions of small businesses across the United States closed their doors for good.

Because of the shutdowns, many business owners are in a financial crisis both concerning their business and personal finances. Many business owners and employees have already filed for bankruptcy.

According to data compiled by MoneyGeek.com, Texas and Delaware have already seen more than 1,350 businesses file Chapter 11 bankruptcy because of COVID-19. Filings in other states are growing.

Why are businesses filing for bankruptcy?

Job loss and the threat of foreclosure are two of the top reasons people file for bankruptcy. This means we can expect to see even more bankruptcies in the near future. Commercial landlords behind on the mortgage could end up in foreclosure, causing all of their tenants to lose their locations.

As of March 2021, there are still federal and state moratoriums on evictions. However, when the moratoriums are lifted, rents and mortgages will become immediately due. By that time, more than a year will have passed and most people won’t be able to pay their debts.

Why were some businesses unable to stay afloat with loans?

Despite grants, loans, and other forms of coronavirus-related financial assistance, many business owners just couldn’t make it work. For some, the Paycheck Protection Program wasn’t enough to keep them going long-term and many employees quit because they were getting more money from unemployment.

An article in the Washington Post describes the impossible situations several businesses faced because of the coronavirus shutdowns. For example, while trying to stay afloat, a music school in Ohio took on nearly $1 million in loan debt and $35,000 in credit card debt. A Rhode Island fine-dining restaurant was given $450,000 to pay workers, but it wasn’t enough and they had to close.

These stories aren’t unique. Thousands of businesses across the U.S. have the same or similar stories. The end result is the same – only the loan amounts vary.

Small businesses need to prepare for possible bankruptcy

It’s an unfortunate reality that many small businesses will need to file for bankruptcy in the near future. Many business owners will also need to file for personal bankruptcy, which will be doubly stressful.

A large percentage of struggling small business owners will file Chapter 11 in an attempt to hang onto their business. They’ve worked hard to create a successful business so it makes sense that they’d want to do everything possible to save it.

Unfortunately, for most small businesses, filing Chapter 11 bankruptcy to reorganize doesn’t make sense. The cost can be as much as 30% of the business’ value. Additionally, 2/3 of all organizations that file for Chapter 11 end up being liquidated instead of reorganized.

Industries most affected by the coronavirus shutdowns

Since the pandemic began, bankruptcy rates have been rising in all industries. Some industries have been hit harder than others. For instance, food service, real estate, retail, and entertainment have been hit hard.

Some say the wave of bankruptcies has already exceeded what was seen in the 2008 crash.

Mass bankruptcies are unavoidable and they’re going to clog the judicial system

A massive number of bankruptcies are right around the corner. However, the judicial system isn’t equipped to handle a large influx of cases. Experts warn that unless the system gets an additional 250 judges, the courts will be stretched thin.

A speedy process makes an organization more likely to recover from bankruptcy. However, small businesses won’t likely see a speedy process since courts tend to prioritize bankruptcy cases filed by large organizations. If a small business has to wait too long, they might end up folding for good.

Are there any solutions?

Nothing can stop the onslaught of mass corporate bankruptcies, but there are ways to cushion the fall.

  • Some debt holders are forgiving partial debt. For financially sound businesses, some debt holders are reducing the amount of debt owed. It’s already going to take those businesses a long time to pay back their debts, so it makes sense to reduce the amount owed.
  • Businesses are filing for bankruptcy now. Rather than wait until things get backlogged, many businesses are filing fast to get a jump on a backlogged court system.

Take things one day at a time

If you can’t make the coronavirus relief packages work to keep your business afloat, you’re not alone. By the end of 2021, many more businesses will have filed for bankruptcy. The best thing to do is file early and don’t hang onto false hope; it will only draw out the process longer.

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