Bankruptcies Fall Again, but What Happens When Interest Rates Go Up?

Year-over-year commercial bankruptcy filings continued their decline in May. A total of 4,017 businesses filed bankruptcy in May 2013, representing a 25% decrease from the 5,341 businesses that filed in May 2012. Total commercial Chapter 11 filings also fell by 25% to 537 filings in May 2013, compared to 716 Chapter 11s in the same period last year.

The decline was mirrored, though not as deeply, in the consumer filings, which fell 11% last month to 92,413, almost 12,000 filings lower than the May 2012 total. All in all, total bankruptcies fell 12% from May 2012's figures, capping off a trend that's been driven by historically low interest rates.

"Sustained low interest rates, tighter lending standards and decreased consumer spending are assisting consumers and companies to shore up their balance sheets," said American Bankruptcy Institute (ABI) Executive Director Samuel Gerdano. "As households and businesses remain committed to deleveraging, the number of filings will continue to decrease."

Currently, with interest rates hovering around zero, it's inexpensive for banks to allow financially-distressed companies to continue limping along with the hope that something in their business, industry or market will improve and they can make good on their financing arrangement. In a similar way, it's easier for most businesses in today's financing environment to continue operating by refinancing their existing debt, instead of acquiring new credit from still-stingy lenders to grow their business. The answer to the question of what happens when the Federal Reserve raises interest rates, which it has pledged to do when the labor market recovers, could be a rash of commercial and consumer bankruptcy filings.

For businesses, Chapter 11 also still remains an extraordinarily expensive procedure, and if the company considering a filing doesn't already know where the financing for a reorganization will come from, it's likely that it will just close its doors rather than attempt a costly bankruptcy proceeding.

- Jacob Barron, CICP, NACM staff writer

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