Generous credit conditions and low defaults in thefirst nine months of 2007 helped business bank-ruptcy drop 5% over the 2006 fiscal year, but experts say filings are likely to rise dramatically in 2008.The Administrative Office of the U.S. Courts said25,925 businesses sought bankruptcy protection in the fiscal year ended Sept. 30, 2007, down from 27,333 in the2006 fiscal year.
Chapter 11 bankruptcy filings in the 2007 fiscal year registered a small drop, to 5,888 from 6,003. Chapter 11 allows companies to restructure their debts and continue operations.
Although the number of business bankruptcies decreased in the 2007 fiscal year, experts say calendar-year data that hasn’t yet been released by the federal courts may paint a different picture.
Credit-market conditions, and the economy broadly, began to worsen last summer. By the end of the year, some economists were predicting a recession.
“Generally, bankruptcy is a lagging indicator of financial woes - it’s not unusual to lag behind several quarters or even a year from dramatic events in the economy,” said Jack Williams, resident scholar at the American Bankruptcy Institute. “What we’re seeing now is an increase in bankruptcy filings, particularly among businesses, because of the financial woes we’re dealing with.”
In January, a private company that tracks bankruptcy statistics reported that Chapter11 filings hit a two-year high in the 2007 calendar year, jumping by 25% to 6,236 from 5,010 such filings in 2006. Oklahoma-based Automated Access to Court Electronic Records, or AACER, recorded 42,755 business bankruptcy filings in 2007, a nearly 43% increase from the 29,993 business filings in 2006.
AACER’s numbers represented the highest levels of Chapter 11 filings since Congress enacted the Bankruptcy Abuse and Consumer Protection Act in October 2005. In the several years before the law, which was designed to make bankruptcy a less attractive option, Chapter 11 flings annually totaled between 9,000 and 11,000.
The most recent calendar-year data available from the courts is for 2006, which saw a total of 19,695 business filings. Federal court data and AACER data vary because of the how the two classify consumer bankruptcy filings.
Williams said the companies that have been hit hard so far include those that have relatively small assets as well as those that are in the housing sector. Two large home-builders, Tousa Inc. and Levitt and Sons LLC, have already sought bankruptcy protection amid the housing downturn.
“We know anything that’s either directly or indirectly related to the housing industry is going to have a rough goof it,” he said. “You may also see some problems developing in the real-estate sector in general, which could include commercial office space as well as mixed use facilities and real estate development.”
Williams predicted that current economic conditions would push the rate of Chapter 11 filings higher and higher and said he was “pessimistic” that filings would stabilize anytime soon.
“What’s keeping many of the businesses going right now is the access to a tremendous amount of liquidity in the market, but that won’t last forever,” he said.
