You may be running into articles lately dealing with the drastic rise of bankruptcy filings starting this year, which are continuing to peak from March’s most recent report. In fact, there were 158,141 bankruptcy filings in the month of March shown in the data released by the Automated Access to Court Electronic Records. You may focus on these statistics and find yourself questioning all the good news related to the recovering economy. After all, isn’t bankruptcy bad?
Well, if you are the business owner (large or small) filing for bankruptcy, or the individual doing the same you will either view the bankruptcy as a recognition of failure, a big relief, or an opportunity to get your ducks in a row. Any way you look it at though, when viewed from afar, this increase in bankruptcy filings is akin to what I spoke about last July concerning the rising unemployment rate. Like unemployment, these bankruptcy statistics are a lagging indicator.
How is bankruptcy a lagging indicator, and if the economy is really in a recovery, why are so many people filing for bankruptcy? Although things are getting better, as we just saw from last week’s employment report, the increasing numbers of people filing for bankruptcy are at the end of their ropes. Businesses and individuals alike view bankruptcy as a last resort. Employers hate to let people go. As revenue and sales decrease, fewer funds are available to pay the bills which do not decrease. The only way to meet demands as usual is to borrow. Many businesses and individuals have increased their debt-to-income ratio so much, in trying to stay in business, keep their employees, or just to stay solvent, that bankruptcy is now the only resort.
It is very easy for us as people to look at this increasingly large number of bankruptcies (bankruptcies tend to peak several months to a year following economic bottoming) as a negative. It is the same when we look at depressed stock prices and market levels, as well as rising unemployment numbers. We look at the readily available information, and extrapolate their negative connotations into the future. Stocks and the markets are going to continue to go down. People are going to continue to be laid off until none of us have a job. Businesses will continue to go out of business until only empty shops remain.
The future, however, is all that matters. When the markets are down, they are cheaper than they previously were, which will eventually be recognized and rewarded by buyers. The rapidly rising unemployment numbers were actually an increase in the numbers of people actively seeking unemployment during the recovery. And as more bankruptcies are completed, debt levels will either be reset or eased, paving the way to new starts, new growth and another chance.
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