Reorganization is becoming a more popular option for US companies seeking to address their financial challenges through bankruptcy.
A greater proportion of companies pursuing bankruptcy opted to reorganize versus liquidate in 2023 than in any other year since 2010, according to S&P Global Market Intelligence data. In 2023, 58.1% of all bankruptcies fell into the latter category, 10 percentage points higher than in 2022. That trend appears to be continuing in 2024, with 63.6% of all filings as of March 14 seeking court approval to reorganize.
US corporate bankruptcies typically fall into two categories: Chapter 7, which involves a total liquidation of assets and termination of operations, and Chapter 11, which allows a business to reorganize its finances before reemerging, usually with leaner operations. Chapter 11 filings can also allow for liquidation, though the cases are much less common.
High interest rates are likely contributing to the increasing proportion of Chapter 11 bankruptcies as interest payments eat into companies’ profits and limit their ability to service their debt. The Federal Reserve increased rates 525 basis points between March 2022 and July 2023 and has kept rates unchanged in subsequent meetings, though officials still expect three rate cuts by the end of the year.
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The coinciding rise in reorganization bankruptcies suggests that companies are pursuing bankruptcy to tackle mounting debt levels in the face of higher interest rates, and they may not otherwise be contending with a structural threat to business continuity, such as declining demand.
Sector breakdown
From 2023 to mid-March 2024, companies across all but the utilities sector were more likely to reorganize than liquidate their operations. The gulf between the two options available to companies was particularly stark among communication services and real estate businesses. In those two sectors, nearly 90% of companies opted to reorganize over the past 15-month period.
Liquidation has proved to be a more popular route in the utilities and financials sectors, with an equal split between the two kinds of bankruptcies among utilities companies and a narrow majority of financials companies opting to reorganize.