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The effect of inflation on bankruptcy filings

On Behalf of | Sep 30, 2022 | Business Bankruptcy |

Business owners are currently dealing with 40-year high inflation rates. Combined with the pandemic, this has caused consumers to restructure the way they purchase, moving away from brick-and-mortar businesses to those offering online goods and services. People are working from home, buying from home, and being entertained from home.

The Federal Reserve, in an attempt to curtail inflation, has raised interest rates, which in turn, affects lenders as well as borrowers. Borrowers, strapped for cash, tend to default on loans, while lenders suffer when so many of their loans are fixed-rate and do not reflect the increase in the prime rate. Now add to this economic house of cards a war in Ukraine, labor shortages and supply chain disruptions.  

Businesses may need to restructure

A seemingly out-of-control economy has businesses reeling, changing their business plans and reorganizing their internal structure. Some businesses have downsized or closed their doors completely. Others are trying to get ahead of the changing economy, adapting to the new ways of doing business. But even the strongest of businesses may struggle to conform. Sometimes cutting expenses, reducing staff and even closing locations is not enough.

Solutions, of course, are individual to each business. What works for a retailer may be totally different than a business that offers services. As a business owner, finding a new business road map and determining what additional resources you need while protecting your current assets could be a solution that provides the business survival you need. In order to keep your business solvent, you may need a fresh start to get you back on track.

Chapter 11 restructuring protects business owners and their creditors

Chapter 11 Bankruptcy protects business owners (debtors) by allowing them to repay their debts while protecting their assets. It gives them a fresh start and lets them restructure and reorganize to optimize their business model. Creditors are compensated, avoiding taking a total loss if the business becomes insolvent. Creditors are prioritized with those holding a property lien given the highest priority.  

The debtor, after filing for Chapter 11, can continue to do business as they have in the past.  The business will generally be required to submit to the court a written disclosure statement and a plan of reorganization to return its business to solvency.