The 2023 Bankruptcy Surge: Unraveling the Causes, Trends, and Impact on Individuals and Small Businesses and the Trillions in Credit Card Debt

According to Reuters, U.S. bankruptcy filings surged 68% in the first half of 2023 from a year earlier, driven by rising interest rates, inflation, and increased borrowing costs.

A total of 2,973 commercial Chapter 11 bankruptcies were filed in the first six months of 2023, compared to 1,766 in the same period last year. Individual Chapter 13 filings also saw a 23% jump, and bankruptcy filings for small businesses jumped 55%.

Some notable companies that filed for bankruptcy in the first half of 2023 include SVB Financial Group, Envision Healthcare Corp., Bed Bath & Beyond, Party City Holdco, Lordstown Motors, and Kidde-Fenwal.

The Federal Reserve has raised interest rates 10 times to combat inflation, which is at a 40-year high. The higher interest rates are making it more expensive for businesses and individuals to borrow money, contributing to the increase in bankruptcy filings.

The Fed is expected to raise interest rates twice by the end of 2023. This could lead to even more bankruptcy filings in the year's second half. The increase in bankruptcy filings is particularly concerning for small businesses. Small businesses are often more vulnerable to economic downturns than larger businesses.

In 2023, the global financial landscape will sharply turn, with bankruptcies reaching unprecedented levels. This surge in financial distress has sent shockwaves through economies worldwide, affecting individuals, families, and small businesses alike.

The Bankruptcy Epidemic Unveiled: Soaring Bankruptcy Rate

Bankruptcy statistics for 2023 have painted a grim picture. According to financial institutions and government agency data, bankruptcies have skyrocketed, far surpassing any previous records. This abrupt surge in bankruptcies has left many individuals and small business owners grappling with financial ruin, and the reasons behind this unprecedented phenomenon are multifaceted.

The Underlying Reasons: Economic Downturn and Recession

One of the primary driving forces behind the 2023 bankruptcy surge is an economic downturn that has resulted in a global recession. The COVID-19 pandemic, which began in 2019, laid the foundation for this crisis, and its ripple effects have continued to wreak havoc on economies worldwide. Lockdowns, supply chain disruptions, and reduced consumer spending have created an adverse economic environment, pushing many individuals and businesses to the brink of insolvency.

Inflationary Pressures

Inflationary pressures have played a significant role in the 2023 bankruptcy wave. Soaring prices for essential goods and services have eroded individuals' purchasing power and the profitability of small businesses. As the cost of living continues to rise, many people struggle to make ends meet, forcing them to consider bankruptcy as a last resort.

Burden of Debt

The burden of debt is another critical factor contributing to the bankruptcy surge. In the years leading up to 2023, individuals and small businesses had accumulated substantial debts, including mortgages, student loans, credit card debt, and business loans. The combined weight of these financial obligations has made it increasingly difficult for many to stay afloat.

Credit Card Debt Reaches One Trillion in US

Credit card debt in the U.S. rose by $45 billion between Q1 and Q2 2023, pushing the total past $1 trillion. Some parts of the U.S., like Washington D.C., Nevada, Texas, and Florida, struggle more than others with credit card debt.

Credit card delinquencies (accounts 30+ days past due) have also risen, topping 5% in July. Analysts expect this figure to keep rising.

Higher-income households ($125k+) have been quicker to curb their monthly credit card spending than lower-income groups. New credit card delinquencies hit 7.2% in Q2 2023, higher than the pre-pandemic 6.86% in Q2 2019. With expectations of a mild recession, delinquencies will likely continue rising. The 90+ day delinquency rate is now 5.08%, up from 3.35% last year.

The impact of the new one trillion in credit card debt on people in the United States is significant. This debt burden is weighing down on many Americans, making it difficult to make ends meet and save for the future.

Specific impacts that this debt is having:

• Higher interest payments: Credit card interest rates are typically high, and the Federal Reserve's interest rate increases are making them even higher. This means that people with credit card debt are paying more and more in interest each month.

• Reduced purchasing power: The high cost of living and high credit card debt payments are reducing people's purchasing power. This means they have less money to spend on other essential items like food, housing, and healthcare.

• Increased financial stress: Credit card debt can be a significant source of financial stress. People with debt may worry about making their payments, and they may feel overwhelmed by the amount of debt they owe. This stress can lead to physical and mental health problems like anxiety, depression, and insomnia.

• Increased risk of bankruptcy: If people cannot make their credit card payments, they may be forced to declare bankruptcy. This can have a devastating impact on their credit score and financial future.

The impact of credit card debt is not evenly distributed. People with lower incomes and less wealth are more likely to have credit card debt, and they are also more likely to be negatively impacted by it. Lower-income families often live paycheck to paycheck and rely on credit cards to stretch their ability to meet monthly expenses. This, however, is a dangerous habit as they’re paying interest for essential purchases like groceries and gas.

The one trillion in credit card debt is a serious problem for many Americans. It is important to be aware of this debt's potential impacts and take steps to manage it responsibly. If you struggle to make your credit card payments, resources are available to help you. You can talk to a credit counselor or debt management company, or you may be able to negotiate with your creditors.

Trends in 2023 Bankruptcies: Surge in Personal Bankruptcies

Personal bankruptcies have witnessed an alarming increase in 2023. Individuals facing job loss, reduced income, and insurmountable debts have no choice but to seek bankruptcy protection. The bankruptcy courts have been inundated with cases, reflecting the sheer scale of this issue.

Small Business Closures

Small businesses, which form the backbone of many economies, have been hit particularly hard. The 2023 bankruptcy surge has forced numerous small enterprises to close their doors permanently. Declining revenues, supply chain disruptions, and the inability to secure adequate financing have left countless entrepreneurs with no alternative but to declare bankruptcy.

Increase in Medical Bankruptcies

One disheartening trend is the surge in medical bankruptcies. Even with healthcare coverage, the high cost of medical treatment and the financial strain of dealing with prolonged illnesses have pushed many individuals and families into bankruptcy.

This trend highlights the critical need for healthcare reform to address these crippling medical expenses. Even with the new regulations for how medical debt is reported to credit reports, the burden of the debt itself is just as stressful.

Family Impact of Financial Stress

Bankruptcy often has a profound impact on families. The loss of homes, savings, and financial stability can strain relationships and disrupt the lives of children. This upheaval can lead to long-lasting emotional scars and challenges for families trying to rebuild their lives. Many divorces are the direct result of financial troubles. Drowning in debt also affects the ability of parents to pay child support.

Effects on Small Businesses: Job Loss and instability

The closure of small businesses affects entrepreneurs and leads to job losses. Employees who depended on these businesses for their livelihoods were left without work, exacerbating the unemployment crisis in many regions. The ripple effect on local communities and economies is substantial.

Small businesses are essential contributors to local economies. Their closure leads to economic instability in communities, as they no longer generate income, pay taxes, or contribute to the region's growth. This creates a domino effect that can lead to a prolonged recession.

The root causes of this surge, including economic downturns, inflation, and unsustainable debt, must be addressed through comprehensive policy measures.