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Economists Argue That a Recession May be Inevitable

One of the major factors in determining the number of and scope of consumer bankruptcies is the presence of an economic recession. To understand the matter, you must first understand the terminology. A recession is a period of decreased economic performance that lasts for months. While the primary determining factor for ranking recessions is related to the GDP, economic indicators such as unemployment are also predictors of a recession. 

While bankruptcies and recessions often go hand-in-hand, the Fed has attempted to reduce the overall number of filings by making it easier to file, changing the rules of bankruptcy, and offering lifelines to businesses and individuals to avoid a catastrophic influx of bankruptcies. For that reason, the COVID recession produced fewer bankruptcies than historical recessions—at least for consumers. For businesses, Chapter 11 bankruptcies became quite common. Many of these businesses are still in Chapter 11 today. 2020 saw more companies with debt liabilities in excess of $50 million than any time since the Great Recession in 2009. Nonetheless, consumer bankruptcies continue to rise in 2022.

Why are Consumer Bankruptcies Beginning to Rise?

Well, one of the obvious reasons has to do with the fact that the money used to extend lifelines to individuals and businesses has all dried up. Those who could not right their ship in the year after the COVID quarantine have nowhere else to turn other than the bankruptcy court to fix their financial situation. Further, moratoriums on evictions and foreclosures gave consumers less reason to declare bankruptcy, and the fact that the federal courts were closed stalled proceedings significantly. 

2021 saw a reduction in the overall number of bankruptcy filings in 2020, but 2022 has seen an uptick in both consumer and business bankruptcies. The surge is especially evident for small businesses that are filing under Subchapter V. Meanwhile, the most recent data indicates that there may be a drop in 2022 filings throughout the rest of the year.

Are Bankruptcies a Predictor of an Economic Recession?

In years past, they have been. Technically, bankruptcy is a secondary effect of an overall lending environment that is not good for either consumers or lenders. Large corporate liabilities are a predictor of downsizing and hiring freezes as well as less spending. This creates a problem for the workers who lose jobs during downsizing. Further, companies that file for bankruptcy tend to stiff suppliers and vendors creating shortfalls elsewhere. So, traditionally, bankruptcies have been associated with recession, but economic manipulation has reduced the overall number of bankruptcies, at least over the short term. 

Finally, during major recessions like the one in 2009, lenders were able to effectively blame the companies for poor management and causing their own problems. In 2020, lenders could not squarely lay the blame on companies resulting in fairer dealings, more leeway, and fewer liquidations. 

Talk to an Indiana Bankruptcy Attorney Today

Attorney Chris Arrington represents the interests of consumers who are deep in debt. We can provide options that financial planners and others will not provide. For more information, call our office today to schedule a free consultation and learn more about how we can get the creditors off your back for good.

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