Law360, New York (August 13, 2008) -- The economic downturn continues to take its toll on the corporate world, with business bankruptcies surging in July to the highest levels since 2006, according to a monthly tally by a bankruptcy research firm.
Last month, 5,664 businesses filed for bankruptcy protection, according to statistics released by Automated Access to Court Electronic Records (AACER), a bankruptcy data and management company that collects and organizes bankruptcy data using federal dockets. That far outstrips the 3,611 businesses seeking protection in July 2007 and 2,485 business bankruptcy filings in July 2006, AACER statistics show.
Bankruptcies had been on the rise throughout 2008 until a slight dip in June. In January, commercial bankruptcies came in at 4,229, according to AACER data. Business bankruptcy filings rose each month until May, when they came in at 5,319. In June, 4,992 companies filed for bankruptcy protection.
The number of filings per day was up as well, according to AACER. The company reported that 257 businesses filed for bankruptcy protection each day for the 22 business days in July. That's up from 172 per day for 21 business days last July, and 124 per day for 20 business days in July 2006.
Of the 5,664 businesses that filed for bankruptcy protection last month, 786 filed Chapter 11, AACER statistics show. Businesses filed an average of 520 Chapter 11 petitions per month last year, the statistics show.
The seizing up of the credit markets has prevented many businesses from getting the financing they need to come out of bankruptcy, resulting in companies taking even more drastic options.
“They're not going into Chapter 11 for a quick car wash,” said Samuel Gerdano, executive director of the American Bankruptcy Institute. “They're getting liquidated.”
In fact, both personal and commercial bankruptcies are at their highest level since Congress enacted bankruptcy reform in 2005. “The economic realities are more powerful than a mere statute,” Gerdano said.
While real estate firms and homebuilders had been particularly hard-hit earlier in the year, retail companies and other consumer industries started to bear the brunt of bankruptcy filings.
Bennigan's Grill and Tavern and Steak & Ale, two restaurant chains owned by the privately held Metromedia Restaurant Group, filed for Chapter 7 protection and closed hundreds of restaurants.
Mervyn's LLC, another regional department store chain on the West Coast, also filed for Chapter 11 bankruptcy protection in July.
With consumer bankruptcies on the rise — AACER reported that the average personal bankruptcies for each month of 2008 were up 26% over the monthly average for 2007 — retailers and the casual dining sector may be in for more pain.
Retailers in particular are looking toward the holiday season for a boost to sales, which could hold off bankruptcy filings for some struggling stores, according to Gerdano.
“If consumers don't pull the wagon out of the ditch, it'll be a pretty bleak ending to the year,” he said.
Billion-dollar bankruptcies appear to be on the rise as well. SemGroup LP filed for Chapter 11 protection in July. According to Bankruptcydata.com, a bankruptcy monitoring firm, the $6 billion company was the eighth billion-dollar business to file for bankruptcy protection before July 28.
And the worst may be yet to come. While bankruptcies of companies worth $100 million or more is on the rise, the big spike could happen in 2009, Bain Corporate Renewal Group, a unit of consulting firm Bain & Co., said in a report last month.
The group said that it expected a total of 50 to 75 bankruptcies of $100 million or more in 2008 and more than 100 in 2009. Bain Corporate Renewal Group reported 13 “big bankruptcies” of over $100 million in 2007 and 14 in 2006.
The research showed that there is a lag of between 12 and 18 months between the bottoming out of gross domestic product and a spike in bankruptcies. According to Bain's estimates, the 0.2% growth in the United States' economy in the second quarter of 2008 was the economy's low point.
Bain estimates that GDP growth will be 1.7% in the third quarter of 2008 and show a steady rise up through to 2.5% growth for the second quarter of 2009.
Overall, Bain said it expects to see an average of 33,000 total business bankruptcies in each of the next two years in the United States, a jump of 20% over 2007 levels.
Bain said it expects an average of 8,100 Chapter 11 filings in the same two-year period, a 30% increase from 2007 levels.
Even with the rise, the number of business bankruptcies being filed does not reach levels seen in the 1980s, 1990s and earlier this decade, according to Robert Lawless, a professor at the University of Illinois College of Law who specializes in bankruptcy.
“They're going up, but they're not going up as much as we'd expect, given the economy,” he said.
Lawless said that while the level of economic distress in which companies find themselves is similar to previous economic downturns, many companies are opting for solutions outside of federal bankruptcy court. That could mean sales of units or liquidations of assets, or going through state court procedures, he said.
“If you go back to what the commercial filings were 20 years ago or even the early part of this decade, we're not going to see those numbers,” Lawless said.
