Business bankruptcies

Categories : Category Insights | Economic Indicators Published on : Jul 27 2017

Since 1990, business bankruptcy filings have generally fluctuated in line with the economy, with the number of filings going up during recessionary years and trending down during the rest. One exception to this activity, however, occurred in 2006 when legislation regarding bankruptcies (The Bankruptcy Abuse Prevention and Consumer Protection Act) distorted what should have been a steady decline from 2005 to 2007. In the year prior to the act’s implementation, businesses rushed to file to take advantage of the old bankruptcy rules, which had fewer restrictions. The new restrictions, which enacted stronger limitations on which bankruptcy chapter businesses could file for as a fraud prevention measure, forced many businesses to avoid filing. As businesses put off bankruptcy, total filings plummeted almost 50.0% in 2006. The exaggerated dip in 2006 then led to a reversal in 2007 because many companies that put off bankruptcy were forced to file. Moreover, as the global financial crisis set in in 2008 and 2009, business bankruptcies soared. In fact, the number of bankruptcy filings increased threefold from about 20,000 in 2006 to about 60,000 in 2009.

The recession hit its low point in 2009 and has been followed by modest economic growth. To illustrate, the number of business bankruptcies dipped below 25,000 in 2015 for the first time since 2006, which is an encouraging indicator of broader economic developments over the period. Overall, the number of business bankruptcies is expected to decline at an annualized rate of 7.5% over the five years to 2018. The rate of decline has been steadily declining as interest rates were low and consumer spending has been high.



Forecast

Business bankruptcies will continue to fall over the five years to 2023 as the economy continues to grow in 2018 and beyond. However, massive declines in business bankruptcies will inevitably plateau as bankruptcies will always be a part of any capitalist economy. Consequently, the number of business bankruptcies is anticipated to fall by an annualized rate of 2.3% over the five years to 2023.

The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 is not expected to affect bankruptcies in the long term. While it dramatically affected the number of bankruptcy filings in the short term, businesses and bankruptcy lawyers have since adjusted to the new regulations. If Congress were to pass a new bill, though, it could have a dramatic short-term effect on filings.


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