Monday, February 8, 2010

Bankruptcies Spike in '09: Wall St., Main St.

In an effort to deter consumers who abuse the system and recklessly run up debt and walk away without a scratch, the Prevention and Consumer Protection Act of 2005 was signed into law. Capital Hill's new bankruptcy act was comprised of a much higher bar for determining eligibility to file, higher fees and the inability to walk away from credit card debt. The act also extended the "7-year" abatement period before filing a second time to "8 years", as well as mandatory credit counseling and debt management workshops. On average, bankruptcy filing in the United Stated was as much as 1.1 million annually, but it was widely believed on Capital Hill that tougher bankruptcy laws would bring that number down significantly. No surprise that there was a spike in consumer filings prior to the passing of the law in October of 2005 , which clearly indicated consumers were rushing to file to avoid having to deal with the tougher laws. Although stats showed a slight dip in filings, it was short lived. The recession, which we now know really started as far back as 2007, fueled a steady increase in bankruptcy filings. By the first quarter of 2009, consumer bankruptcies were up as much as 32 percent.

Sadly for corporations, the story is even worse. In 2008 corporations filing for bankruptcy increased 74% over the previous year. To make matters worse, 2009 was also a horrific display of corporate carnage with 249 (publicly traded) corporations filing for some form of bankrupcompanies who filed, did so under a pre-structured package. It’s rightfully assumed that pre-structured bankruptcies are viewed less pessimistically by shareholders and creditors. So it should be no surprise that industry analysts and rating firms, such as Moody’s and Standard and Poors, view structured bankruptcies more positively as well. Accordingly, public corporations see this as a proactive step toward damage control. This also explains why pre-structured bankruptcy filing jumped 300% in the past 24 months. It’s the corporate strategy that neutralizes negative perceptions, while buying time to dig out of the financial ditch. If this recession has taught us anything, it has taught us that "time" is a corporation's biggest ally. Perhaps if Lehman Bros. had been able to hang on another 4 months, it might have been able to sneak onto the bailout line for a little life support. Click for Part 2

K. Reilly


1 comment:

  1. This article tells a scary story about where our economy is still showing weakness. I am hopefull that families and small business will be able to survive this recession. The large companies may go out of business, but it appears that the CEOs,officers and managers escape with golden parachutes, so they do not suffer as much as smaller companies. This of the families who are potentially suffering every time a company goes into bankrupcy.

    We can only hope for the best