Business Bankruptcy Rates in 2023 — Are We Really Headed for a Recession?

Rising business bankruptcy rates have many wondering if a recession is imminent. 

Exactly how are business bankruptcy rates trending for 2023 and what will that mean for the economy?

We examine the current and historical effects of business bankruptcy rates on the economy, and whether or not they may contribute to an economic recession.

Defining a Recession

A recession is commonly defined as two consecutive quarters of decline in the GDP. Recessions are known for causing job losses and the slowing down of consumer spending, which ultimately leads to less investment in businesses and more bankruptcies.

How Are Business Bankruptcy Rates Trending So Far in 2023?

US bankruptcy filings continued to drop in 2022, but the outlook isn’t as good for 2023. With previous support systems, such as low interest rates and government aid now gone, some experts are predicting default rates to increase from 1.5% by the end of September 2022 to 4.8% by September 2023, as companies struggle to pay debt.

While the economy shrank during the first two quarters of 2022, it grew at an annual rate of 2.6% during the last quarter. Experts credit a rebound in U.S. exports, such as the rise in shipments of natural gas and oil in response to the war in Ukraine.

Is an Upward Trend in Business Bankruptcies a Sign of a Recession?

Bankruptcy increases don’t necessarily signal a recession, but they are likely to increase if the U.S. enters a recession.

In some cases, the end of federal pandemic aid has put mounting financial pressure on companies, while others face a downturn in consumer spending due to rising interest rates and inflation causing stress to household budgets.

While bankruptcies have certainly increased in 2023, they have not yet reached pre-pandemic levels. But some experts believe they will rise above their pre-pandemic levels in 2023 by 2%. 

What Have Business Bankruptcy Rates Looked Like Historically Leading Into a Recession?

The most notable economic crisis in recent years has become known as the Great Recession of 2007 to 2009. What started with a sharp increase in housing prices in 2006, eventually led to the U.S. economy bottoming out in 2009. 

Incredibly, more than 60,000 business bankruptcies were filed in response to the crisis.

Prior to the 2007-2009 recession, the 1981-1982 recession was the worst economic crisis in the U.S. since the Great Depression. Unemployment in the manufacturing sector largely affected the economic downturn, resulting in unemployment rates of up to 24% in some industries. 

A shocking 82,446 business bankruptcies were filed as a result of this recession.

While neither of these recessions was triggered by business bankruptcy rates, they certainly contributed to the high rate of default among both small and large businesses.

How Can Businesses Protect Themselves From Bankruptcy During a Recession?

No business is immune to the effects of a recession, whether it's a decline in sales and profits or credit impairment. Knowing how an economic downturn may affect your company can help mitigate some of the risks of bankruptcy.

Protecting cash flow and building creditworthiness ahead of a recession is key to survival. Focus on the following tactics to help prepare your business ahead of a recession: 

• Try to cut back on spending, renegotiate vendor terms, and arrange for financial assistance in advance.
• Position your business to negotiate favorable terms with lenders by paying off debt quickly when business is good.
• Aim to have a cash reserve between 6-12 months of operating expenses.

Preparing your business to outlast a recession takes planning, but it puts your company in a better place regardless of what happens with the economy.