A recent report from Reuters.com highlights a growing trend of business bankruptcy filings in the U.S. While personal bankruptcy filings have actually decreased in recent months, some lawyers are predicting that 2012 through 2014 will see upticks in business bankruptcy reorganizations.
Some lawyers, it seems, have already reported an increase in clients.
A Double-Dip Recession?
One factor some analysts are watching is the U.S. economy’s ultimate move toward or away from a double-dip recession. First, a quick look at where the economy is now: though unemployment remains high and the housing market has still not recovered from the rash of foreclosures that touched off the Great Recession, the U.S. is technically not in a recession right now – probably.
A recession only occurs when the country’s gross domestic product (GDP) recedes, or shrinks over successive quarters. In other words, when there is a decrease from one measurement period to the next, the country is in a technical recession.
The problem is, there’s no way of determining whether an economy is in a recession until after the fact – that is, we can’t measure this month’s data until next month.
Recessions & Business Bankruptcies
During economic recessions, bankruptcy filings tend to rise. That’s led some insiders to point at recent numbers reported on BankruptcyData.com:
- Ten companies worth $100 million or more filed for bankruptcy in September of this year. The $100 million mark is often considered the threshold for a “large” company.
- September had the highest rate of business bankruptcies since April, when 17 large companies filed.
- Business bankruptcy filing rates have not been so high since 2009, when the country was in the thick of the recession.
Still, business bankruptcy numbers alone cannot establish the presence or absence of recessionary conditions. But businesses do tend to need bankruptcy protection more often when the economy is receding than when it is growing.
In 2008, for example, the beginning of the recession touched off the United States’ biggest bankruptcy ever. Lehman Brothers, a company worth $639 billion, filed for bankruptcy protection and caused a number of financial ripples for its customers - and the global economy.
On the other hand, a recession alone will not automatically trigger a business to file for bankruptcy. Banks’ willingness to lend money, consumers’ behavior, and developments in foreign markets could all impact future business bankruptcies in the U.S.
And often (as the airline companies have demonstrated), filing for bankruptcy can let a business restructure to emerge as a stronger entity than it was before. That’s because in bankruptcy court, businesses can eliminate debt, renegotiate costly labor contracts, modify lease agreements and otherwise take important steps to ease their financial burdens.