Bankruptcy is a path to debt relief often used by individuals and businesses in times of prosperity as well as calamity. The year 2020 has dealt tough blows to many families and businesses for reasons that nearly all Americans understand all too well. Many may be compelled to consider bankruptcy for the first time.
Even before the great difficulties of the first half of 2020, many budgets were already stretched, and bankruptcy sometimes provided necessary debt relief. Investopedia, a popular internet-based source of financial analysis, reported in late 2019 that, “the prices for daily goods have increased…above and beyond what can be accounted for by inflation, giving the dollar much less buying power than it had just 20 years ago.”
On top of common budgetary tensions, the COVID-19 pandemic, beginning in early March, was followed by major civil unrest in late May and early June. Effects included decreased demand for products and services and the destruction through vandalism of many commercial properties in New York City and other major U.S. cities. The aftermath of these disasters may lead many private individuals and couples, including many small business owners, to the brink of bankruptcy: Chapter 7, Chapter 13 or Chapter 11, in most cases.
Reasons for personal and business bankruptcies
Even in “ordinary times,” top causes of personal bankruptcy identified by Investopedia have included:
- Medical expenses and job loss
- Poor or excessive use of credit
- Divorce or separation and unexpected expenses
Meanwhile, triggers for small business bankruptcy cited by researchers have included:
- Natural disasters (including disasters like fires)
- Poor cash flow
- Loss of the key person in a business
These same researchers concluded that, “Evidence suggests that failure rates of small businesses…are related to the nature of a capitalistic market in relying on competition where only the strongest survive. The causes for small business failure and ultimately bankruptcy are many.”
Sharp blows to the business community
Losses to businesses in 2020 have included a sharp decline in demand due to stay-at-home orders, imbalanced payroll burdens and forced closures following urban disturbances.
So can we expect to see an uptick in personal and business bankruptcies as part of the struggle toward recovery? CARES recovery funds (allotted by Congress to mitigate the pandemic) and public and private recovery funds directed at riot-related losses may help, but even these lifelines may not change the fact that bankruptcy will likely be a necessary pathway to a financial fresh start for many.