Rise of ‘Mega Bankruptcies’ Leaves Economists Worried

SVB Financial. Yellow. Bed Bath & Beyond. All big companies, all filed for bankruptcy.

And as The Wall Street Journal (WSJ) reported Sunday (Oct. 8), it’s part of a jump in Chapter 11 filings among larger companies that has economists worried. 

Such filings tripled in the first half of the year, coming at a time when households have exhausted the savings they built up during the pandemic and banks are curtailing lending.

The increase in corporate bankruptcies “is a worrying sign for the outlook,” Stephen Brown, deputy chief North America economist at Capital Economics, told the WSJ. “Businesses that go bankrupt still have to cut costs, they still have to probably lay off workers.”

And while unemployment rates are still near 50-year lows and job growth is strong, the report notes that this growth is weaker at larger companies.

There were 16 “mega bankruptcies” — by companies with more than $1 billion in assets — in the first half of the year, compared to a half-year average of 11 between 2005 and 2022, the WSJ said, citing data from consulting firm Cornerstone Research. 

The rise in bankruptcies, a tepid stock market and increased credit card delinquencies, indicate the American economy is heading for a recession, Steven Blitz, chief U.S. economist at GlobalData TS Lombard, told the WSJ. However, he thinks a downturn will still be much less dire than the 2007-09 recession.

“You’re not going to see the kind of bankruptcies and balance-sheet stress that you saw during that period,” Blitz said. The recent increase in bankruptcies doesn’t mean “the economy is heading into some doom-death loop.”

Meanwhile, personal bankruptcies are increasing as well. Data from “The Credit Accessibility Series: How Consumers Use Overdrafts,” a PYMNTS Intelligence and Sezzle collaboration, showed that some consumers reported having to file bankruptcy due to a lack of money to cover overdraft fees.

And data released by the Administrative Office of the U.S. Courts in July showed that bankruptcy filings in the country rose 10% in the year ending in June, compared with the previous year. 

The double-digit spike is worth noting considering that filings “over any 12-month period have increased only rarely since filings peaked in 2010,” with bankruptcies falling “sharply after the pandemic began in early 2020,” per the data.