Small business bankruptcies have surged by 61% compared to last year, according to data from bankruptcy analyst Epiq. The firm reports that commercial filings for Chapter 11 bankruptcies have reached 4,553 so far this year, signaling significant economic distress among smaller enterprises.
This trend is not limited to small businesses. Total corporate bankruptcies are also on the rise, hitting their highest levels since the COVID-19 pandemic began, as reported by S&P Global Market Intelligence. The retail sector has been particularly hard hit, with numerous chains filing for bankruptcy this year, including the popular seafood restaurant Red Lobster.
The causes behind this spike in bankruptcies are multifaceted. Inflation has driven up business costs, forcing companies to raise prices and potentially alienate customers. High interest rates have put additional strain on businesses, making it more difficult to manage debt and secure financing. Furthermore, the repayment of COVID-19 loans is becoming a significant burden for many companies.
During the pandemic, the Small Business Administration (SBA) issued approximately 4 million loans, totaling around $380 billion, through its economic injury disaster loan program. These loans were separate from the Paycheck Protection Program (PPP) loans, which distributed about $800 billion. While most PPP loans have been forgiven, the economic injury disaster loans must be repaid. Currently, about 80% of these loans – roughly $300 billion – remain outstanding, suggesting that the wave of bankruptcies related to these loans may just be beginning.
The impact of these economic pressures extends beyond small
businesses. The American Bankruptcy Institute reports that total corporate bankruptcies have increased by 34% year-over-year. Corporate bankruptcies for the year to date have reached their highest level since 2010, surpassing even the numbers seen during the height of the COVID-19 pandemic.
Industries reliant on discretionary consumer spending, such as restaurants, hotels, clothing retailers, and media companies, have been the most severely affected. This pattern is typical during economic downturns, as consumers cut back on non-essential purchases. Already, 17 restaurant chains have filed for bankruptcy this year, including not only Red Lobster but also Rubio’s, Tijuana Flats, and World of Beer.
Individual bankruptcies are also on the rise, increasing by 15% compared to last year. Alarmingly, the rate of increase is even higher among millennials in their 20s, who collectively carry $1.1 trillion in debt despite being relatively early in their careers. The primary factor driving personal bankruptcies appears to be high interest rates, with average credit card rates now exceeding 22%. This level of interest can cause debt to rapidly accumulate, making even minimum payments challenging for many individuals.
Looking ahead, there is a mix of potential relief and concern. The Federal Reserve has recently implemented significant rate cuts, with projections suggesting further reductions of up to 2 percentage points over the next 12 months. While this may alleviate some pressure from high interest rates, it also signals growing concerns about an impending recession.
As the economic landscape continues to evolve, businesses and individuals alike will need to navigate these challenges carefully. The coming months may see further increases in bankruptcy filings as the full impact of past economic policies and current market conditions unfolds. Policymakers and economic leaders will be closely watching these trends as they work to stabilize the economy and prevent a more severe downturn.