Increased litigation, including preference actions and disputes over reorganization plans, can contribute to complexity and delays in bankruptcy cases, but they are typically symptoms rather than direct causes of bankruptcy increases. The main drivers of bankruptcy filings tend to be broader economic and business-related factors, such as:
- Economic downturns: Recessions, inflation, or slow growth can hurt companies' revenues and cash flows, leading to financial distress.
- Industry-specific challenges: Certain industries, such as retail or energy, may face structural changes (e.g., shifts to online shopping or price volatility in commodities) that increase bankruptcy risks.
- High levels of debt: Companies with heavy debt burdens may struggle to meet obligations, especially if interest rates rise or access to capital tightens.
- Pandemic-related disruptions: Events like COVID-19 can cause widespread business closures, supply chain issues, or demand shocks, leading to a wave of bankruptcies.
- Regulatory changes: New laws or regulations affecting industries or markets can sometimes lead to financial stress.
Litigation within bankruptcy processes, such as preference actions (where creditors are sued to recover payments made before bankruptcy) or disputes over reorganization plans, can lengthen or complicate proceedings. While they can increase the cost and complexity of resolving a bankruptcy case, they do not directly cause an increase in bankruptcy filings. Instead, these litigations reflect efforts to resolve issues that arise during the restructuring process.
Increased litigation might indicate a more litigious or contentious environment for resolving bankruptcy cases, but it is usually part of the process after companies have already filed. So, while it may be a factor in the resolution and outcomes of bankruptcies, the primary causes of an increase in bankruptcies are economic pressures rather than litigation itself.