In 2024, bankruptcy filings among U.S. businesses increased significantly. By the end of Q3 2024, 512 businesses had filed for bankruptcy, surpassing the same period in 2023 (504) and nearing the record set in 2020 (518). This trend is driven by a combination of economic challenges, including inflation, higher interest rates, and geopolitical uncertainty.
Here's a closer look at what's contributing to the rise in bankruptcies and how businesses, particularly small enterprises, and navigate the process with revised rules introduced in 2022. Contributing Factors to the Rise in Bankruptcies Economic and operational pressures are driving more businesses to seek bankruptcy protection. Key challenges include:
- Decreased demand: Changes in customer preferences and competition from nimble, data-driven businesses can reduce market share.
- Cash flow shortages: Poor working capital management—such as late payments, excess inventory, or bad debts—can strain resources.
- Ineffective debt management: Borrowing to cover shortfalls can lead to unsustainable interest payments.
- Leadership challenges: A lack of experienced management may prevent businesses from adapting to market changes.
- Fraud and cyberattacks: Smaller businesses are often less equipped to absorb losses from scams or cyber incidents.
Understanding Bankruptcy Basics Bankruptcy is a legal process that provides a “fresh start” for businesses unable to meet their financial obligations. The most common bankruptcy options include:
- Chapter 11 (Reorganization): Allows businesses to restructure debts and continue operations.
- Chapter 7 (Liquidation): Involves selling assets to repay creditors, with remaining debts typically discharged.
- Chapter 13: Available to sole proprietors or self-employed individuals, with stricter income and debt thresholds than Chapter 11.
Subchapter V of Chapter 11: Relief for Small Businesses The Small Business Reorganization Act (SBRA) of 2019 introduced Subchapter V, streamlining the bankruptcy process for small businesses with no more than $2.75 million (indexed for inflation) in secured and unsecured debts. Recent updates in 2024 increased this limit to $3.02 million, offering more businesses access to:
- Simplified reorganizations: Eliminating procedural hurdles and lowering costs for small business debtors.
- Flexible debt repayment: Administrative expense claims can now be paid over the life of the plan rather than upfront.
- Residential mortgage modification: Small business owners can restructure mortgages tied to business purposes.
- Quicker discharges: Debts can be discharged after completing a repayment plan in 3–5 years.
How CPAs Can Help Bankruptcy and reorganization are complex processes where financial advisors play a critical role. A CPA can assist with:
- Budget preparation: Developing viable reorganization plans or identifying ways to avert bankruptcy.
- Debt restructuring: Negotiating with creditors to create manageable payment terms.
- Financial analysis: Assessing assets, liabilities, and financial statements for court or IRS requirements.
- Tax compliance: Ensuring adherence to federal and state tax regulations during and after bankruptcy proceedings.
Moving Forward Bankruptcy doesn’t have to mean the end of your business. With proper planning and expert guidance, reorganization can offer a path to recovery and future success. If you’re concerned about your business’s financial health, our team at Reynolds + Rowella is here to help. Contact us today for personalized advice and support.
Reynolds + Rowella is a regional accounting and consulting firm known for a team approach to financial problem solving. As Certified Public Accountants, our partners foster a personal touch with our clients. As members of DFK International/USA, an association of accountants and advisors, our professional network is international, yet many of our clients have known us for years through the local communities we serve. Our mission is to operate as a financial services firm of outstanding quality. Our efforts are directed at serving our clients in the most efficient and responsive manner possible, delivering services that exceed the expectations of those we serve. The firm has offices at 90 Grove St., Ridgefield, Conn., and 51 Locust Ave., New Canaan, Conn. For more information, please contact Elizabeth Bresnan at 203.438.0161 or email.
