Now that pandemic aid has vanished, bankruptcies are on the rise
The end of federal pandemic aid is putting many Americans and businesses under mounting financial pressure, leading to a spike in bankruptcies.
Total bankruptcy filings in January shot up 19% in January to 31,087, up 19% from a year ago, according to data from Epiq, a legal research firm. The number of Americans who filed for bankruptcy across Chapters 7, 11 and 13 shot up 20% in January from a year ago.
The surge in filings comes as rising interest rates and high inflation continue to stress household budgets.
"There's no cash coming in from the government anymore," Amy Quackenboss, executive director at the American Bankruptcy Institute, told CBS MoneyWatch. "Some people are finally experiencing that economic crunch. They're having to pay their mortgage, their car payments. There are several people who haven't been able to weather that storm."
Difficulty hiring in a tight labor market, the ongoing war in Ukraine and fears of a recession have also prompted some companies to file for bankruptcy, Quackenboss said. That said, while bankruptcies have increased, they still haven't reached pre-pandemic levels, she added.
Reality setting in
The federal government sent $817 billion in stimulus payments to Americans, according to a New York Times estimate, but that lifeline ended in March 2021. Congress similarly doled out $800 billion in Paycheck Protection loans to companies large and small before that program ended in May 2021.
Those federal funds helped struggling companies and individuals for about a year and a half, but reality is starting to set in, bankruptcy experts said.
- U.S. economy is slowing to stall speed, recession gauge shows
- Famed investor Michael Burry predicts U.S. recession "by any definition"
- U.S. likely to enter a recession within 12 months, economists say
"Many businesses were sort of eking it out during COVID-19 and have just now filed for bankruptcy," said Paige Marta Skiba, a bankruptcy law professor at Vanderbilt University. "They just now realized their business won't survive outside that protected world of paycheck protection payments."
Bankruptcy filings likely to climb
Although hundreds of companies declared bankruptcy last year, most of the headlines went to large brands. Revlon filed for bankruptcy in June citing supply-chain woes, while Cineworld Group — the parent company of Regal Cinemas — filed for bankruptcy in September with $5 billion in debt.
Crypto companies, including BlockFi, Celsius Network, Three Arrows Capital and Voyager Digital, also went bust last year. However, none of those bankruptcy filings was more dramatic and impactful than that of FTX Trading. FTX co-founder Sam Bankman-Fried went from being CEO of the crypto world's third-largest company to facing federal charges for investor fraud following the sudden collapse of the cryptocurrency exchange.
Bankruptcy filings will likely climb this year if the U.S. enters a recession, exacerbating problems already impacting the economy, Quackenboss said.
- Bed Bath Beyond has a plan to avoid bankruptcy
- Feds seize more than $170 million in cash accounts linked to Sam Bankman-Fried
"The more bankruptcies happening, particularly more Chapter 7s, you'll see services and industries die and jobs going away and that's never a good thing," she said.
There's one silver lining to increased bankruptcies — they could bring rise to the next big, successful company, Steve Nickles, a law professor at Wake Forest University, said.
"Businesses go out, there's a hole in the market, so there's an opportunity," said Nickles, who teaches bankruptcy. "That sounds crass, I know, but it's the truth. Bankruptcies leave gaps for entrepreneurism."