October 7, 2020 | less than a minute read

We are not out of the woods

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Michael J. Venditto

Partner

Get in touch

Michael J. Venditto

Partner

The torrid pace of bankruptcy filings by U.S. businesses has ebbs and flows, but the tide is not receding. The economy continues to struggle under the weight of the COVID-19 pandemic.

There has not been any substantial change in the fundamentals of the business cycle and Washington has been unable to produce another round of stimuli. So, we need to be careful about drawing conclusions from any short term variance in the rate of bankruptcy filings.

This article from Bloomberg identifies several factors that point to a prolonged downturn. But the biggest impediment to economic growth in the U.S. is consumer confidence. Until people feel their jobs are secure, and safe outside their homes, consumption and economic demand will remain anemic and businesses will continue to restructure or fail.

The avalanche of bankruptcies isn’t expected to stop any time soon as damage to the U.S. economy from Covid-19 spreads. After the worst third quarter ever, more companies may seek protection from creditors than in any year since the global financial crisis. “It wouldn’t surprise me if we hit a record for filings this year,” said Kevin Carey, who was a bankruptcy judge in Delaware for 14 years. “Companies are going to continue to experience distress. They have rent to pay, whether it’s an office or manufacturing facility, debt service to keep up with, vendors to repay, and the challenge of employee retention,” Carey said in an interview. Carey expects the pandemic to be a longer lasting drag on businesses than the terrorist attacks of Sept. 11, 2001 or the 2008 crisis.