Why Aren't We Seeing More Bankruptcies?

Big bankruptcies have been trickling in this year as the US continues to navigate through the coronavirus pandemic. Many of these companies filing for bankruptcy have been, unsurprisingly, airline and travel companies, and now we are seeing more and more big names like J. Crew and J.C. Penney added the list. “In May alone, some 27 companies reporting at least $50 million in liabilities sought court protection from creditors -- the highest number since the Great Recession,” reports Bloomberg.

Many experts think the U.S. will continue to see this level of filings for a while. However, while we are seeing an increase in bankruptcies from some of these larger-liability companies, we are not really seeing the same influx overall. According to Reuters Business News, Chapter 11 filings increased 26 percent between April 2019 and April 2020, but bankruptcy filings overall fell by 46 percent from this time last year.

A recent podcast by NPR, Where Are The Business Bankruptcies?, discusses how the hierarchy of lending has helped delay the bankruptcy process for small businesses. With doors closed or operations limited, many businesses are generating little to no revenue, making it nearly impossible to pay rent. The Federal Government has granted leniency to banks, such as modifying loans without too much scrutiny and relaxing rules about how much capital they must keep on hand, says NPR. In turn, the government expects banks to go easy on landlords, enabling them to have leniency with their tenants, keeping spaces occupied and business open. Without these breaks from rent payments, we might be seeing a much larger number of bankruptcies right now.

The relief Chapter 11 bankruptcy would hope to bring in this situation is lost by the stipulation that if a business filing for bankruptcy has any past due rent it must be paid in full before proceeding. In this case there’s really not much difference in Chapter 7 and Chapter 11 bankruptcy, leaving little options for smaller businesses.

The lack of bankruptcies we’re seeing right now could be due to a number of factors. The government’s response to this pandemic, in the form of Paycheck Protection Program loans and other small business aid as well as personal stimulus checks, seem to have provided enough help to alleviate some economic damage, or perhaps businesses and families have enough hope for the future to hold on and wait it out, or maybe this aid has slowed the wave of bankruptcy for now, and as some experts say, “with luck, the economy may recover before the wave breaks.” ¹