It Happened in Texas in the Late 80s: Bankruptcy Filings Spiked as the Economy Rebounded! What Can We Learn?

I was involved in the “Savings and Loan Debacle” in the late 1980s when hundreds of banks were being closed by the FDIC and many notes were being called in. The economy was totally upside down with interest rates at upwards of 18% for normal bank loans and hard money was out of sight. An impossible economy. Different than the current business downturn, but much can be learned from what happened then.

One phenomenon that we observed and evaluated carefully was the unexpected spike in bankruptcies as the economy returned to health. Interest rates fell and business began to expand for everyone, yet bankruptcies spiked higher than ever! It should have been the other way around… but it wasn’t. It seemed that business was returning to normal, however, bankruptcies were simultaneously accelerating at a very rapid rate. It made no sense.

Why were so many small businesses filing for bankruptcy when the economy was returning to a healthy level?

Here is what we learned:

Yes, the economy was returning, but the small businesses were so damaged and had built up so much unpaid debt in arrears that even though they were all experiencing greater revenues and may have been able to once again to support their debt service requirements, the additional weight of the unpaid debt in arrears from all sources (including unpaid bank debt) was sinking their ships. They were too damaged to return to profitability.

Thus, there was a rush to the bankruptcy courts to clean up the historical build-up once everyone believed salvation and growth was again possible. It made greater sense to strip off the debt so the business could flourish in the reviving economy.

I see parallels now. As people begin to believe the recession is turning around, they will confront their debt with a different attitude, believing growth and new business will return, and realizing that the debt they are carrying will not be affordable. Thus, bankruptcies will increase as they’re considered a cleansing option, launching a return to better times.

My point being, the small business owners of the 80s intrinsically understood that there was no real opportunity for return to normal, for emergence and growth while carrying all of this bad debt baggage. There was no escaping the day of reckoning when you either had to pay or die.

Even if the economy does turn around, it will not turn around quickly and your business will not return to previous highs for many years. Therefore, the thought of dragging along the unaffordable debt because you believe the economy is returning, is, and will remain, an anchor around the throat of the small business owner, forcing your hand to either pay, or die.

Taking history into account, we can surmise you should DO THE WORKOUT NOW, rather than wait and file for bankruptcy in the face of emergence. Then, you can handle whatever happens with the economy—good or bad—as you will be set to operate and, yes, emerge successful whether or not the economy rebounds.

If you do the workout (whether or not you believe the economy is rebounding) you will be able to reap the benefits. Bankruptcy, on the other hand, will wipe your business out. A workout will support your emergence and free you to succeed no matter what happens.

Waiting for the trumpets to blow announcing the end of the recession and time to do business again as we once did, is also the sound of bankruptcy; you will never be able to afford the payback. Do the workout now and enjoy whatever happens as you will have cleaned up your business and will be ready for anything.