Companies Increasingly Choose To Reorganize versus Liquidate
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Filed under: News
When businesses struggle to maintain financial growth and profitability, the options can be limited. Many businesses will be forced to choose between reorganization or liquidation. In a reorganization, the debtor retains ownership of its assets and continues business operations while renegotiating debt repayments with creditors. In a liquidation, the creditors seize control of the debtors assets and sell them to pay off the debt. In years past, liquidation was thought to be the fastest, easiest route to regain profitability. However, reorganization is becoming a more common choice for US businesses considering bankruptcy as a way to deal with their financial difficulties.
Based on data from S&P Global Market Intelligence, more companies filing for bankruptcy chose to reorganize rather than liquidate in 2023 than in any other year since 2010. The percentage of bankruptcies in the latter category increased by 10 percentage points to 58.1% in 2023 from 2022. By requesting court authority to restructure, 63.6% of all filings as of March 14 seem to be in line with that trend in 2024.
US corporate bankruptcies generally fall into two categories: Chapter 11, which permits a corporation to reorganize its finances before resurfacing, usually with leaner operations, and Chapter 7, which entails a complete liquidation of assets and termination of operations. Liquidation may also be permitted through Chapter 11 filings, albeit these instances are quite rare.
Since interest payments reduce a company’s earnings and make it more difficult for them to pay off debt, high interest rates are probably a factor in the rising number of Chapter 11 bankruptcies. Although authorities still anticipate three rate decreases by the end of the year, the Federal Reserve raised interest rates by 525 basis points between March 2022 and July 2023 and has since maintained them at those levels in future sessions.
The increase in reorganization bankruptcies raises the possibility that businesses are filing for bankruptcy in order to address their accumulating debt in light of rising interest rates rather than because they are facing a fundamental danger to their ability to continue operating, like dwindling demand.
Source: https://www.spglobal.com/marketintelligence/en/news-insights/latest-news-headlines/us-companies-increasingly-opt-to-reorganize-in-bankruptcy-not-liquidate-80941865