By John Butzer
Introduction
As the COVID-19 pandemic shut down businesses across the United States, many experts expected a flood of business and individual bankruptcy filings. Instead, in 2020, bankruptcy filings across all chapters were the lowest they had been in thirty-five years. Some have argued that government stimulus programs have given companies and individuals a lifeline that have merely delayed these filings. Are we on the precipice of a deluge of bankruptcies as the economy reopens and congressional response to the pandemic withers?
Background
Frankly, the economic situation of many businesses was not rosy even prior to the pandemic. Economic researchers found that many companies entered 2020 carrying historically heavy debt loads. By one estimate, corporations in the United States owed $10.5 trillion to creditors in 2020, reflecting debt levels thirty times higher than they were fifty years ago.
As the pandemic began to shut down or severely curtail business operations, the economy immediately felt the damage. In the first two quarters of 2020, the United States GDP contractedby 9.5%. A few high-profile companies could not sustain the hit to their businesses and sought to restructure through bankruptcy. These companies included household names such as Hertz, Neiman Marcus, and J. Crew. Many observers saw these major corporate bankruptcies as a harbinger of the disaster to come—but the anticipated flood of bankruptcy filings never materialized.
Government and Market Responses
The federal government responded to the economic damage wrought by the pandemic with a $1.2 trillion economic stimulus package known as the Coronavirus Aid, Relief, and Economic Security (CARES) Act. Signed into law on March 27, 2020, this Act established the Paycheck Protection Program (PPP), the Main Street Lending Program, and supplemented state unemployment insurance. These programs provided targeted financial assistance to businesses and individuals.
First, the PPP provided $349 billion in forgivable small business loans. Loans were available to businesses with less than 500 employees and were provided with a 1% interest rate. The program was so popular that the government added $320 billion to the initial funding. By April 2020, the government had distributed all of the allocated $669 billion in loans. This program enabled many small business recipients to stay afloat and meet their immediate obligations, such as payroll and rent.
Second, the Main Street Lending Program provided financial assistance to larger businesses. The $500 billion fund provided low-interest loans for businesses with either fewer than 10,000 employees or less than $2.5 billion in revenue. These loans had a minimum of $1 million and loan maximums were set for certain industries, such as airlines. This program was also available to states and municipalities.
Lastly, the CARES Act supplemented and extended unemployment benefits to individuals. Most notably, the Act established the Federal Pandemic Unemployment Compensation, which provided an additional $600 a week to the unemployment benefits administered by each state. The Act also created a new form of unemployment insurance with broad eligibility guidelines that included gig workers affected by the pandemic. Lastly, an additional thirteen weeks of unemployment benefits were provided for those whose benefits were exhausted.
These initiatives provided direct assistance to both businesses and individuals. Taken together, they created a metaphorical dam that held back a flood of both business and individual bankruptcies. Without this government assistance, many businesses may not have been able to meet their financial obligations—pushing them into bankruptcy. Moreover, many individuals may have been forced to declare bankruptcy without supplemental unemployment insurance.
The market also responded to this crisis to prevent business failures. It appears many creditors of small businesses have been flexible and willing to work with businesses to adjust the terms of their loans. According to a Census Small Business Pulse survey, 11.5% of all small businesses missed a loan payment by the first week of May, while 23.6% had missed other payments, such as rent. These types of warning signs usually indicate imminent default on other obligations, often ending in bankruptcy. Yet creditors appear to be providing leniency in these situations. If the business itself is financially sound but has taken a hard hit from COVID, many lenders may agree to be lenient on repayment schedules or even reduce the amount owed. From the creditor’s perspective, receiving a reduced amount is better than the business declaring bankruptcy—a situation where the creditor may get nothing at all.
Looking Ahead
Taken together, these government actions have almost certainly contributed to the surprisingly small number of bankruptcy filings. But no help lasts forever. Many argue that an additional stimulus is urgently needed to carry businesses and individuals through the end of the pandemic. However, at the time of this writing, negotiations regarding an additional stimulus package have stalled.
Amid the continuing pandemic, small businesses are at greater risk of failing. When it comes to business bankruptcies, larger companies often use bankruptcy as a tool to restructure their debt and seek more favorable repayment terms, allowing them to stay open. Small businesses simply do not have the same type of leverage to restructure their debts. Instead, they utilize bankruptcy to settle their debts and close their businesses. Without further government assistance, it is likely that bankruptcy filings for small businesses will rapidly increase.
Additional support for individuals is also on the negotiating table. Members of Congress have proposed increasing federal unemployment payments by $400 and providing an additional one-time stimulus payment. These proposals are especially critical now, given the Federal Reserve’s conclusion that the current unemployment rate may be as high as 10%.
Conclusion
Decisions regarding continued assistance to businesses and individuals will have nationwide impacts. Congress faces a challenging task in balancing the provisions of a new stimulus package with the slowly recovering economy. Only time (and congressional action) will tell whether more help is on the way. Without continued assistance, the dam may break, and the anticipated flood of bankruptcy filings may finally reach the courts.
