Federal Reserve Policy and Its Effect on Bankruptcy

June 12, 2013

For the last several years, the United States Federal Reserve Bank, the financial entity with the ability to set interest rates, has kept the cost of borrowing money low in an attempt to encourage economic growth and prevent a “double-dip” recession. In Texas, during this period, the economy has been improving. But it’s difficult to know whether this growth is because of – or in spite of – Fed policy.

 

And some suspect that the number of bankruptcies in D/FW is artificially low as a result of Fed policy and that a flood of filings may be just around the corner.

 

In North Texas, the Fed’s low-interest policy has likely resulted in a significant decrease in the number of business bankruptcies. The first quarter of 2013, for instance, saw an 11 percent decline from the same period in 2012 in Chapter 11 filings. Looking back even further to 2011, the decline is even more steep.

 

Critics of the Fed’s “cheap money” policy and its effect of discouraging Chapter 11 filings have prompted some to call this the era of “extend and pretend.” Banks are extending loans, they say, and pretending that their debtor’s underlying business reality is not as bad as it appears.

 

If these predictions are accurate, debtors and their creditors may soon find that even a modest increase in interest rates may kick off a wave of business filings. That may, in turn, put pressure on bankruptcy professionals and courts to process the significant influx of bankruptcy filings.

 

Want to know the extent to which your small business is exposed to the risk that interest rates increase in the months ahead? Do you have your own “break the glass” plan in which you begin taking steps toward bankruptcy? Answer these questions and many more important concerns like them by talking to the dedicated professionals at Fears Nachawati today. We’re prepared to advise you.

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