July was the hottest month for bankruptcy filings since the number of filings cooled off after new bankruptcy laws took effect nearly three years ago, new data show. Last month, 5,664 businesses sought to liquidate or restructure under bankruptcy protection, the highest monthly total since Congress’ overhaul of the Bankruptcy Code took effect in October 2005, according to Automated Access to Court Electronic Records. AACER’s data shows that this is only the third time in the past few years that the monthly total has topped 5,000.Retail remains one of the hard-hit sectors, with such companies as Steve & Barry’s and Mervyn’s LLC grabbing headlines last month when they filed for bankruptcy. Smaller retailers like CMT America Inc. and Shoe Pavilion Inc. also found themselves in bankruptcy court.
Consumers devoting more of their income to gasoline and facing high unemployment rates are spending less on non-essential goods, according to Mark Scarberry, a bankruptcy law professor at Pepperdine University.
“When you have an economy that is, at its best, growing very slowly, and large amounts of money being diverted to pay for high energy costs,” Scarberry said in an interview Thursday, “you’re going to have a lot of difficulty with businesses that are involved with selling in all sorts of markets, particularly to consumers.”
Scarberry said in response, consumers are favoring discount retailers at the expense of mid- or high-level chains like Kohl’s Corp. and Saks Inc., which reported declining sales of 10% and 5.3%, respectively, last month. Costco Wholesale Corp. and Wal-Mart Stores Inc., on the other hand, posted respective 10% and 3% increases in sales.
“You see people shifting in their purchasing and looking for the better deals,” Scarberry said. “That’s going to hurt a lot of segments in retail.”
July’s new business bankruptcies marked a 57% increase from the 3,611 business filings in July 2007. Last month’s new filings also included energy company SemGroup LP and the parent company of restaurant chains Bennigan’s and Steak and Ale.
Chapter 11 filings, AACER’s data show, continue to climb. The 786 businesses and individuals who sought Chapter 11 protection last month is the highest monthly total so far this year, a 12% increase from the 699 Chapter 11 filings in January.
Business bankruptcies include filings under Chapter 7 and Chapter 11 of the U.S. Bankruptcy Code. In Chapter 7, an independent official is appointed to oversee the company’s liquidation and to distribute the proceeds to creditors. In Chapter 11, businesses are allowed to choose whether they’ll restructure or liquidate and typically retain control of their bankruptcy case.
Consumer bankruptcy filings also remain on the uptick, increasing by 48% last month over the previous year, reported the American Bankruptcy Institute. Using data from the National Consumer Bankruptcy Research Center, the ABI said the 94,124 new consumer bankruptcy filings in July also marked a nearly 14% increase from the 82,770 filings in June.
Earlier this year, ABI estimated that consumer bankruptcy filings would top 1 million by the end of 2008. Through the first seven months, AACER reports that consumer filings have neared 575,000.
