Corporate bankruptcies in the United States have surged to a 14-year high, raising concerns about the state of the economy and the challenges businesses face in the current financial landscape.
At a Glance
- U.S. corporate bankruptcies reached a 14-year high in 2024, with 694 filings
- High interest rates, inflation, and weakened consumer demand contributed to the surge
- Notable bankruptcies include Rite Aid, Bed Bath & Beyond, and WeWork
- Experts predict more bankruptcies in 2024 as corporate debt comes due
- Consumer discretionary and industrial sectors were hit hardest, accounting for 28% of filings
Record-Breaking Bankruptcy Filings
The year 2024 saw a historic rise in corporate bankruptcies, with 694 enterprises filing for bankruptcy protection. This marks the highest level since 2010, surpassing even the economic downturn during the pandemic. The surge in bankruptcies is attributed to a combination of factors, including high interest rates, lingering effects of inflation, and weakened consumer demand.
Many well-known companies succumbed to financial pressures, filing for bankruptcy protection. These include retail giants Rite Aid and Bed Bath & Beyond, as well as the once-promising office-sharing startup WeWork. While many of these companies filed under Chapter 11, which allows for restructuring rather than complete shutdown, the sheer number of filings paints a stark picture of the economic challenges businesses face.
FirstFT: US corporate bankruptcies hit 14-year high https://t.co/wihqOu6cpQ
— FT Economics (@fteconomics) January 7, 2025
Economic Factors Driving the Surge
The Federal Reserve’s aggressive interest rate hikes to combat inflation have had a significant impact on businesses. Higher borrowing costs have made it increasingly difficult for companies to service their debt, particularly for those already struggling with weak balance sheets. This has led to the rise of “zombie companies” – firms unable to cover interest payments on their debt from current profits.
“The surge in bankruptcies is a stark contrast to 2021 and 2022, when only 777 bankruptcy filings occurred combined, largely due to the Fed’s rate-cutting programe,” the Financial Times reported.
Consumer spending patterns have also shifted, with many Americans cutting back on discretionary purchases. This has particularly affected companies in the consumer sector, such as Party City and Tupperware. Gregory Daco, Chief Economist at EY, explained the situation: “The persistently elevated cost of goods and services is weighing on consumer demands.”
It’s not complicated. But apparently it was to President Joe Biden.
The consumer discretionary and industrials sectors have borne the brunt of the bankruptcy wave, accounting for 28% of the total filings. This trend reflects the reduced spending on non-essential goods and services as consumers grapple with higher living costs. The U.S. manufacturing sector also ended 2024 in a prolonged slump, further exacerbating the situation for many businesses.
“Higher for longer is the mantra headed into 2025,” Bankrate Chief Financial Analyst Greg McBride said.
Can Trump turn this around?
