Bankruptcies were up this year, in spite of the U.S.'s improving economy
JUANA SUMMERS, HOST:
Rite Aid, Bed Bath and Beyond, Party City, Vice Media, WeWork. These are just some of the hundreds of companies that filed for bankruptcy this year. Despite an improving economy, 2023 has been one of the busiest years in a decade for corporate bankruptcies. To help us make sense of all this, we are joined by NPR's Bobby Allyn. Hey, Bobby.
BOBBY ALLYN, BYLINE: Hey, Juana.
SUMMERS: So Bobby, how does 2023 compare to years past when it comes to bankruptcies?
ALLYN: Yeah. You know, it's been pretty bad this year. There were nearly 600 corporate bankruptcies. That's higher than the past couple years and one of the highest in the past decade. Now, just to clarify things, we're talking mostly about a kind of bankruptcy called Chapter 11. It's when a company on really shaky financial footing tries to reorganize to stay alive. You know, they can refinance debt. They can sell assets, try to trim down the size of the company. This is not liquidation, right? It's not the kind of bankruptcy that closes a company's doors forever. But still, a company only files for Chapter 11 bankruptcy when it's on the brink of collapse, and that just happened a lot this year.
SUMMERS: OK. But I've been hearing a whole lot about positive economic news this year, so help us square this. How did all these companies that you and I are talking about end up in such dire straits?
ALLYN: Yeah. Well, during the pandemic, the fed kept interest rates at near zero. Borrowing costs were at rock bottom, and companies seized on this. Corporations took out lots of debt and used those loans for hiring and growth. Then in recent years, interest rates started notching up pretty rapidly. Companies were then running out of cash and not able to take out new loans because borrowing was just more expensive. And, you know, this comes just as these corporations were loaded up with debt. That, of course, led to bankruptcies. I talked to Edward Altman. He's a bankruptcy expert at New York University, and he expects the bankruptcy situation to only get worse in the coming years.
EDWARD ALTMAN: Certainly, the high interest rates that we've had now for at least a year and the enormous buildup in corporate debt in the last three or four years is contributing to the stress this year. And my outlook is for this to continue into '24 and '25 with perhaps even higher number of bankruptcies.
SUMMERS: So Bobby, with all of these companies filing for bankruptcy this year and perhaps more coming next year, how could this affect the overall economy?
ALLYN: Yeah. There are a number of ways, right? When bankruptcy are on the rise, banks become more stringent about lending to companies with lots of debt. Bankruptcies, of course, often result in mass job loss for workers at those firms. And, you know, seeing headlines about bankruptcy after bankruptcy after bankruptcy is bad for consumer confidence. It gives the impression that the economy is in rough shape. At the same time, corporate bankruptcy is an integral part of how the U.S. economy works. And while no company, of course, wants to file for bankruptcy, it can be viewed as more of a feature than a bug. It creates a lot of pain for companies and certainly workers, but it often can extend a lifeline to a company.
SUMMERS: But many companies do come out of bankruptcy just fine, right?
ALLYN: Yeah. That's right. Going through Chapter 11 bankruptcy is something many big companies or even entire industries have gone through. Nearly every U.S. airline has gone through bankruptcy, cut down costs and, you know, come out a profitable company. You know, back in 2009, General Motors did the same - entered bankruptcy, cut its debt and expenses and was able to survive. Like I said, bankruptcy may sound like a scary word, but sometimes bankruptcy is about giving a company some breathing room, a way to sort of pare back what's not working. But not every company can come out of it. Sometimes Chapter 11 bankruptcy is the first step towards a company going completely under. But at least with some of the big-name bankruptcies this year, most are expected to stick around - just a lot smaller than before.
SUMMERS: Bobby, thank you.
ALLYN: Thanks, Juana.
SUMMERS: That's NPR's Bobby Allyn. Transcript provided by NPR, Copyright NPR.
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