What Happened in Texas in the Late 80s?

Ngelmu.co

I had been involved at the "Savings and Loan Debacle" in the late 1980s when countless banks were closed by the FDIC and lots of notes were predicted in.  The market was completely upside down with interest rates at up of 18 percent for normal bank loans and hard money was from sight.  An impossible market.  Different than the current business downturn, but much could be learned from what happened afterward.

One phenomenon that we observed and studied carefully was the unexpected spike in bankruptcies as the market returned to normal.  Interest rates dropped and business started to expand for everyone, yet bankruptcies spiked higher than ever!   It appeared that business had been returning to health, however, bankruptcies were concurrently accelerating at a really rapid speed. 

Why were numerous small companies filing for bankruptcy once the market was returning to a healthy upswing level?

Here's What we learned from our observations:

Yes, the market was coming back to healthy level, but the small companies were broken and had built up so much outstanding debt in arrears that even though they were experiencing higher revenues and might have been able to once again encourage their debt service requirements, the further burden of the outstanding debt in arrears from all sources (including unpaid bank debt and defaulted SBA loans) were beating their ships.  Unfortunately, they had been too damaged to return to profitability.

Therefore, there was a rush into the bankruptcy courts to clean up the historic build-up once everyone thought salvation and growth was again possible.  It made greater sense to strip off the debt so the business could flourish in the reviving market.

I see parallels now plus a few similarities.  As people start to believe the downturn is turning around, they will confront their debt using a different attitude, considering growth and new business will reunite, and realizing the debt they're doing won't be affordable.  Therefore, bankruptcies will increase as they're regarded as a cleansing option, starting a return to better times.

My point is that: the small business owners of the 1980s intrinsically understood there wasn't any real opportunity for their business to come back to normal, for emergence and growth while carrying all of this terrible debt bags.  There was no escaping the day of reckoning if you had to cover or die.

Even if the market does turn around, it won't turn around fast and your business won't return to previous highs for several years to come.  As a result, the thought of dragging over the unaffordable debt since you believe the market is coming, is, and will remain, an anchor around the throat of their little business operator, forcing your hands to pay, or die.

Taking history into consideration, we can surmise you ought to DO THE WORKOUT NOW, rather than wait and file for bankruptcy in the surface of emergence.  Then, you can handle anything happens with the market--good or bad--as you'll be set to function and, yes, emerge successful whether the market rebounds.