“Judgement Day is near”: SVB Financial Group files for insolvency. More and more companies and consumers are also filing for bankruptcy.

The company’s Chapter 11 bankruptcy filing on Friday is another development in a banking crisis that has rocked stock markets and raised pointed questions about banks’ financial health.

After bankruptcy cases declined during the pandemic, are they making a comeback?

In January, new consumer and commercial filings increased 19% to 31,087 compared to the same period last year. In February, they rose 18% to 31,889.

The data was compiled by Epiq Bankruptcy, a bankruptcy analysis division of Epiq, a legal technology services company, and the American Bankruptcy Institute, a professional organization for attorneys, accountants, judges, professors and others in the bankruptcy field.

“A strong labor market is helpful for people. What is more helpful is a labor market that pays people wages that keep pace with inflation and rising debt burdens.’

– Pamela Foohey, Professor at the Cardozo School of Law

Bankruptcies eased during the COVID-19 pandemic. Last year there were a total of 387,721 bankruptcies, up from 413,616 in 2021, 544,463 in 2020 and 774,940 in 2019 separate data from the American Bankruptcy Institute.

But those numbers are a far cry from the peak of a Great Recession of 1,593,081 bankruptcies in 2010.

Tightening access to credit and rising interest rates for businesses and consumers are likely to accelerate their return, bankruptcy experts say.

“You see companies that are so sick that it’s inevitable,” said Al Togut, a partner at Togut, Segal & Segal, a boutique law firm specializing in corporate bankruptcy.

Companies that would otherwise seek bankruptcy protection are benefiting from liquidity in the financial system, Togut added. Liquidity refers to how easy it is to access cash and/or buy and sell assets.

“That doesn’t mean they don’t need restructuring, because they do. And judgment day will come,” Togut added.

Pamela Foohey, a professor at the Cardozo School of Law, where her specialty is consumer bankruptcy, echoed Togut’s sentiment, saying that “doomsday” is coming for consumers too.

But that can take time. Consumers often view bankruptcy as a last resort, struggling to pay off their debts for two or three years before turning to bankruptcy court, she said.

The recent percentage increase in case numbers may sound “dramatic,” Foohey said, but that’s because they’re descending from low numbers and are still below pre-pandemic levels.

types of bankruptcy

Common bankruptcies for people include Chapter 7 bankruptcy, liquidation of assets to pay debts, and Chapter 13 bankruptcy based on repayment plans.

A Chapter 11 bankruptcy – which SVB Financial is doing – allows companies to restructure their debt.

A Chapter 13 installment plan for an individual is similar to a Chapter 11 plan for a business, Foohey explained. In 2021 and 2022, the new applications fell again. There were around 380,000 new cases filed last year, including crypto exchange FTX.

The number of people filing for bankruptcy protection through Chapter 13 recovery plans skyrocketed in the past year more than 30% Year after year, according to the American Bankruptcy Institute.

According to the American Bankruptcy Institute, the number of people filing for bankruptcy protection through Chapter 13 repayment plans increased more than 30% year over year.

Both Togut and Foohey say more bankruptcies are on the horizon If and not If.

For consumers suffering from the wear and tear of inflation, Foohey said the job market for now can only help the most financially strapped households hold out that long. And people can only bet so much on credit cards, she added.

“A strong labor market is helpful for people. What is more helpful is a labor market that pays people wages that keep up with inflation and rising debt burdens,” she said.

Shares plummeted under pressure on Friday afternoon.

The Dow Jones Industrial Average DJIA,
ended Friday down 384 points, or 1.2%, to close at 31,861. The S&P 500 SPX,
fell 43 points, or 1.1%, to 3,916. The Nasdaq Composite COMP,
lost 86 points or 0.7% to close at 11,630.

“The Chapter 11 process will allow SVB Financial Group to preserve value while evaluating strategic alternatives for its valuable businesses and assets, particularly SVB Capital and SVB Securities,” said William Kosturos, Chief Restructuring Officer of SVB Financial groups said in a statement.

SVB Financial Group is no longer affiliated with Silicon Valley Bank. After California regulators shut down Silicon Valley Bank and the Federal Deposit Insurance Corporation filed for bankruptcy, the successor bank, Silicon Valley Bridge Bank, is subject to FDIC jurisdiction.

New York regulators also closed Signature Bank Sunday and the FDIC placed it in receivership.

Source : www.marketwatch.com

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