Bankruptcy Increases During COVID-19

Jun 24, 2022

The COVID-19 pandemic has thrown the U.S. economy into disarray and has put many businesses under serious financial strain. As a result, many will soon file for bankruptcy protection. The worst hit industry has been retail, with many stores closing or being under-capacity. In addition to the impact on the economy, many consumers have lost their social life. The restrictions on social interactions and limited capacity will limit the amount they spend.

As more people file for bankruptcy, the number of court cases will rise. The bankruptcy courts will become overcrowded, with larger firms getting the higher priority. Meanwhile, smaller firms are more likely to be dismissed and liquidated without the protection of the court. In the meantime, there will be subsidies and payment moratoria to encourage out-of-court restructuring. This way, banks can restructure debt and keep their balance sheets healthy.

Bankruptcy filings for individuals increased by 9% in 2021. These increases occurred along with the withdrawal of state-backed financial aid during the Covid-19 pandemic. In 2021, 14,081 businesses and individuals filed for bankruptcy. That is an increase of 1,169 over 2020. However, the increase in bankruptcy filings can also be attributed to the fact that government interventions helped delay many people from reaching their bottom.

As a result, the number of bankruptcies is expected to rise again by more than a quarter in 2022. In addition, the CARES Act introduced a moratorium on foreclosures, which reduced the demand for bankruptcy protection. The CARES Act and the Paycheck Protection Program streamlined the chapter 11 process, which should help in reducing the number of companies filing for bankruptcy.

In addition to the COVID-19 impact, the fallout from the pandemic has been even worse than the Great Depression. Moreover, this pandemic has prompted more job losses and decreased corporate balance sheets. In addition to the increased number of business and personal bankruptcies, this pandemic has also lowered the GDP of the U.S. economy by 9.5% in the first two quarters of 2020.

Although the economy is expected to expand in 2019, the recession has left some industries more vulnerable than others. In 2020, 77 hotel and gaming companies filed for bankruptcy protection. This is up from 92 in the previous year. The tourism industry, on the other hand, grew in growth, and is expected to remain strong. With the rising number of companies filing for bankruptcy, consumers should be prepared for the next recession.