Bankruptcy Surge in 2023: Impact and Outlook

Total bankruptcy filings increased 18% year-over-year in 2023—likely due to high interest rates, maturing business loans and inflation. Chapter 11 bankruptcies increased 72% year-over-year and Subchapter V filings rose 45%, according to a report from Epiq. "While representing a substantial year-over-year increase, total bankruptcy filings remain lower than the pre-pandemic total of 757,816 recorded in CY2019," the report reads.

Financial conditions eased in Q4 of 2023, with the Federal Reserve pausing rate hikes, but what does this mean for the bankruptcy landscape in 2024? Many expect insolvencies to continue rising despite possible rate cuts.

What they're saying: Experts agree that the increase in bankruptcies will most likely have a back-end impact on the credit industry. "I think in 2023 we already saw an uptick in bankruptcies and will continue to see that uptick in 2024 due to a number of factors," said Jason Torf, Esq., partner at Tucker Ellis LLP (Chicago, IL). "We'll see most of the impact on real estate and commercial lending, Subchapter V filings and lasting impact of high interest rates. Businesses might be unable to refinance that debt, so insolvency events are more likely with respect to all businesses—whether small, midsize or large—further triggering an uptick in bankruptcy-like events."

Real Estate and Commercial Lending

With 16% of companies being fully remote, and 83% of the global workforce in a hybrid work model, there has been a large rise in vacant office buildings. Delinquency rates for office loans were at their highest rate in mid-2023 (2.8%) since the pandemic began, according to finance analytics from Trepp.

"Tenants have the buying power and are taking up less space, so we're going to see the glut of empty space in commercial office buildings all over the place," said Torf. "In some cases, landlords may not be able to service their debts leading to more commercial office building owner bankruptcies or distressed events to a lot of commercial office properties."

Why it matters: The increase in bankruptcies will most likely have a back-end impact on the credit industry. Credit managers will need to remain vigilant in their financial analyses. Some credit professionals recommend taking a close look at profit margins as 2023 year-end financials roll in. "You must look specifically at that interest expense line item and compare that number to the prior year," one credit manager explained during NACM's Thought Leadership Discussion Group. "Most companies will have profit margins that virtually stay the same, but in some cases, they could have a multimillion dollar drop in higher interest costs. They can have the same amount of debt, but the interest cost will be much higher."

Credit professionals should always consider the financials of potential, new and existing customers. Interest rate increases are the common denominator in most risk-inducing impacts, so staying proactive with your customers is key. "The early bird gets the worm," Torf said. "Being proactive is going to be incredibly important for 2024. If your customer is paying late at all, you want to get to the bottom of it, and quickly, before you keep shipping new goods or providing new services. You don't want to be the largest creditor in a customer bankruptcy."

Despite the rising bankruptcy rates, proactive measures such as revising credit policies and establishing credit limits could help mitigate financial risks for businesses in 2024. "You want to make sure to follow the policy and stay on top of those things early and often," said Torf. "Demand to review the policies in the first quarter of this year given the potential uptick in distress as 2024 progresses."

-Kendall Payton, editorial associate