Thanks to lingering credit-market woes and a downturn in the U.S. economy, more than 18,000 businesses filed for bankruptcy during the first four months of 2008, a number that’s equal to nearly half of all the businesses that sought court protection in all of 2007, according to data released Friday.Through April, 18,328 companies sought protection under Chapters 7 or 11 of the U.S. Bankruptcy Code, according to data released by Automated Access to Court Electronic Records, or AACER. That’s 43% of the 42,843 businesses that filed for bankruptcy during all of last year.
In the midst of a credit crunch that has dried up financing for a host of companies, more businesses are unable to survive the added hits of declining consumer confidence and higher commodity prices. Experts say there’s no end in sight for the upsurge in business bankruptcy filings.
“We expect business bankruptcy filings to continue at a pretty hefty rate,” said Jack Williams, resident scholar at the American Bankruptcy Institute in Alexandria, Va.
According to AACER, a private company that tracks bankruptcy statistics, business bankruptcies have increased every month this year. According to data from AACER, 5,173 companies filed for bankruptcy in April, an increase of 10% over the 4,724 filings in March.
“They’re just the beginning of this particular cycle,” Williams said. “We’ve got so many businesses right now that are one poor business cycle away from financial disaster.”
While companies on solid footing are starting to line up important financing deals to keep their businesses running and to pay off debt, the credit markets “remain closed” to weaker borrowers, says Marshall S. Huebner, co-head of Davis Polk & Wardwell’s insolvency and restructuring practice. This could continue to drive up the number of business bankruptcies, he said.
The latest big-name bankruptcy came Friday, when retailer Linens ‘n Things Inc. sought Chapter 11 protection after weeks of speculation. The home-goods chain, which operates nearly 600 retail stores, attributed its troubles to the slump in the housing market and depressed consumer spending.
“Consumer confidence continues to be relatively weak,” Huebner said. “The combination of high gas prices and the home mortgage situation is leading a lot of families to pull in. They spend less money and retailers have less revenue.”
Consumers are spending less on retail products because they’re putting that money toward paying bills, Williams said.
“We have a record level of the amount of disposable income that is allocated to simply the servicing of existing debt,” he said. “That suggests there’s very little of discretionary spending.”
Consumers who aren’t able to pay off their debt are also seeking bankruptcy protection in greater numbers, the ABI reported Friday. Using data from the National Bankruptcy Research Center, the ABI found that 92,291 individuals filed for bankruptcy last month, up 47.7% from April 2007.
Americans are still reeling from the subprime mortgage crisis, which has seen home foreclosures rise dramatically.
During the first three months of 2008, foreclosures increased by 112% over the year-ago period, according to data from RealtyTrac, an online marketplace for foreclosure properties. Foreclosure filings were reported on 649,917 properties - one in every 194 U.S. households - between January and the end of March. This represents a 23% increase over the number of foreclosures seen in the last three months of 2007.
As more adjustable-rate mortgages reset at higher interest rates, more homeowners will be unable to make their payments and may turn to bankruptcy to avoid foreclosure, Williams said. Experts are predicting that consumer bankruptcies could top 1 million this year.
“That situation will only get worse,” Williams said.
