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Business Bankruptcy Statistics After COVID-19 Economic Crisis


Business Bankruptcy Statistics After COVID-19 Economic Crisis

The COVID-19 pandemic has wreaked havoc on the global economy, causing many businesses to struggle and some to even go bankrupt. New data shows that business bankruptcies have risen significantly since the start of the pandemic in early 2020. Let’s take a look at the stats and what they might mean for the future.

Small Businesses Hit the Hardest

The increase in Chapter 11 filings shows that large corporations are struggling. But small-to-medium sized businesses have likely been hit even harder.

Small businesses often operate on thinner profit margins and have less access to credit than major corporations. This makes them more vulnerable when sales decline, which happened for many during COVID-19 lockdowns and economic uncertainty.

While the stats on small business bankruptcies aren’t as readily available, surveys show many small businesses suffered severe revenue losses in 2020 and some were forced to shut down for good. Up to one-third of all small businesses could close due to the pandemic’s economic effects, some experts estimate.

So while the hard numbers aren’t all in yet, it’s safe to assume small and mid-sized businesses have seen sharp increases in bankruptcies too. The pandemic’s economic fallout has clearly been devastating for many.

Lower Than Expected…For Now

Interestingly, the rise in business bankruptcies has actually been lower than many experts predicted based on past recessions.

Filings should have increased much more than they did in 2020 given the sudden economic contraction and spike in unemployment last year. One theory is that government assistance like PPP loans and stimulus checks helped keep some businesses afloat temporarily.

Additionally, bankruptcy courts were closed for a period during the pandemic and have had restricted operations since. This reduced access may have prevented some struggling businesses from filing.

So while business bankruptcies are up sharply, the numbers are still below what we’d expect given the scale of the economic crisis. But some experts warn this could change soon.

A Ticking Time Bomb?

Government aid that helped limit business bankruptcies earlier in the pandemic is now gone. And bankruptcy courts have largely reopened and resumed normal operations.

So we could see a surge of “catch up” filings in 2022 and 2023 as struggling businesses finally seek bankruptcy protection. Some economists have warned business bankruptcies could spike 63% from current levels over the next year.

Plus, other pandemic-related challenges like supply chain disruptions, labor shortages, and inflation are compounding pressure on businesses. Consumer demand and spending power may also decline amid high inflation and interest rate hikes.

All of this creates a risky environment where a lot more businesses, especially small-to-medium sized ones, could fail in the coming year. We’ll have to wait and see how bad it gets.

Potential Long-Term Changes

With business bankruptcies already elevated and possibly rising more, there could be some longer-term ripple effects.

For starters, increased bankruptcies may keep unemployment higher for longer as more companies are forced to cut staff or close up shop completely. Liquidations could also slow the economic recovery.

Higher business failure rates could make lenders and investors more cautious about financing startups and small businesses. And more vacant commercial real estate from bankrupt companies could drive down rents and property values.

On the other hand, widespread business failures may present new opportunities. As assets get redistributed to stronger companies, new entrepreneurs emerge, and innovations arise out of necessity. Creative destruction can be a force for positive change.

So while bankruptcies indicate hardship now, they could also sow the seeds for future growth after a painful economic reset.

Bracing for Impact

The bottom line is that business bankruptcies have already risen substantially following the economic shock of COVID-19. And the worst may be yet to come over the next year or two as government aid runs out while pandemic-related challenges persist.

However, the ultimate economic impact depends on how quickly consumer demand rebounds and how well businesses adapt to the new environment. There are always opportunities amidst crises for those positioned to seize them.

But we can expect the bankruptcy wave to cause some broader economic pain and turbulence first. All we can do is brace for the impact, try to support local businesses, and hope the recovery comes sooner rather than later. This too shall pass.

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