American bankruptcy filings hit first post-pandemic rise

(CN) — After seeing several years of decline, U.S. bankruptcy filings increased nearly 17% last year, according to data published Friday by the Administrative Office of the U.S. Courts.

Business filings rose 40%, from 13,481 filings in 2022 to 18,0926 in 2023.

Last year’s filings fell 17% below the 22,780 business bankruptcies filed in 2019 before the Covid-19 pandemic.

Many bankruptcy scholars attribute the trend to two post-pandemic trends: the rising of interest rates and the expiration of financial aid programs.

“On the business side, there's been this buildup of debt over the past couple of years, and now it's coming to a head,” explained Laura Coordes, a professor at Arizona State University’s Sandra Day O'Connor College of Law.

“We had really, really low interest rates during the pandemic and, on the corporate side of things, that enabled companies to take out a lot of debt for cheap.”

Bankruptcy, as Coordes described it, is a process built into the financial system that allows businesses and individuals to reset and better position themselves for the current state of the economy.

“A lot of times this can be a chance, particularly for businesses, to right-size themselves and to get on firmer footing so that they can thrive,” Coordes said. “On a larger level, I don't think this signifies a major economic problem that needs to be addressed as much as I see this as how we get back to normal.”

Non-business bankruptcies increased 16% over the last year, from 374,240 in 2022 to 434,064 in 2023. Last year’s filings were roughly 40% fewer than the 752,160 filed by individuals in 2019.

A 2023 paper published in the Journal of Banking & Finance connected rises in bankruptcies to lenders being less willing to loan money, "particularly among low-income households and in areas where marketplace loans for financing medical bills are severely rationed."

Individuals often use marketplace lending to avoid bankruptcy particularly through refinancing debts.

Although the bankruptcy process helps individuals discharge debt — particularly after unexpected financial shocks like medical care — the process can still be emotionally taxing.

"People do not want to file bankruptcy because of all the stigma and the shame associated with it,” said Michael Sousa, a professor at the University of Denver's Sturm College of Law. “People do not voluntarily and freely file bankruptcy. Most individuals take this process very seriously, and only do it when they're out desperate and have no other no other opportunities.”

In a paper published in the Emory Bankruptcy Developments Journal last year, Sousa argued bankruptcy is a necessary tool to maintain financial stability.

“We live in a capitalist society where life is unpredictable for most Americans, where jobs precarity and living with debt is a feature of modern capitalism,” Sousa explained.

“There is always going to be hundreds of thousands of filings for bankruptcy every year, because people file for bankruptcy for unexpected consequences that are life such as medical debt, unemployment, underemployment, and family breakups.”

Thus Friday's reported increases have been long expected, as consumers have to pay more, increasingly, to survive both day-to-day expenses and unexpected financial shocks.

“The bankruptcy surge that we're seeing now is something that's been anticipated for a very long time,” said Brook Gotberg, a professor at Brigham Young University’s J. Reuben Clark Law School.

“When credit is cheap and easy, you tend to see fewer bankruptcies because people can simply borrow more and refinance the debts that they have," Gotberg explained. "When interest rates go up, when credit becomes harder to find, that's when you start to see bankruptcies.”

Gotberg doesn’t expect to see bankruptcies continue to rise through the end of the decade since the process is designed to provide relief and temporarily pull filers out of debt. Decreases in bankruptcies are also likely to follow when the Federal Reserve lowers interest rates.

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