Summer 2009 review: Business bankruptcy on the rise as economy spirals and jobs are lost in vicious cycle

July 23rd, 2009 by Mike Hinshaw

[Editor's Note: This is the final part of a three-part series on U.S. bankruptcy in the Summer of 2009. Part I is here; Part II is here.]

We know from Part I of this series that personal bankruptcy filings are up nearly 37 per cent in the first half of 2009 compared to the same six-month period in 2008–and of course that was higher than in 2007.

But as the economy skids further south, we’re now seeing more commercial bankruptcy, too.

And that can lead to job loss, which of course can lead to missed mortgage payments, unpaid medical bills and eventually personal bankruptcy.

Among the big names we’ve become accustomed to in the headlines are GM and Chrysler–even Six Flags and Eddie Bauer. And although many people have been following the CIT Group story, many seem to believe it’s simply another case of a formerly dependable lender getting mixed up with toxic paper, subprime mortgages and securitized loans. Or maybe people are simply sick of hearing about companies that “are too big to fail.”

The concern is about the prospects of the business where CIT really made its mark, which is in niche lending for small business, especially in the realm of short-term financing.

Quoted in a July 20 AP story, Jeffrey Knopman said, “CIT is like an octopus with its tentacles that reach out to so many industries and sub-industries.” Knopman works at Profit Solutions Group, described as a company that helps suppliers recover chargeback money from merchants.

“A primary business of CIT is short-term financing,” the article continues, of  “mostly to small- to medium-sized businesses that can’t afford to wait the 60 to 90 days it takes to get paid for shipments to retailers.

“This business, known as ‘factoring,’ also guarantees that suppliers get paid by the merchants. Without that guarantee, suppliers would have to ship goods at their own risk.”

Other examples might be a construction company that services small to medium businesses. The construction company might not even use CIT–but its clients and vendors do.

Of course, CIT might make it. Certainly it’s depressed stock made a little rally on news of financing from its bond holders.

But the fear that CIT customers–and the firms they do business with–are crying about to Washington is what has already been happening in pockets around the nation.

For instance, this July 1 brief from the South Florida Business Journal: “The number of business bankruptcy filings in South Florida rose in June compared to last month, but held steady compared to last year, according to preliminary statistics from the U.S. Bankruptcy Court for the Southern District of Florida.

In the district, which spans nine counties including Miami-Dade, Broward and Palm Beach, 135 businesses filed bankruptcy petitions last month. That’s a 45 percent increase from May’s total of 93 and roughly the same as last year, when 136 businesses filed.

The number of personal bankruptcy filings rose by 8 percent in June, to 2,553 from 2,358 in May. This June’s personal bankruptcy filings were 56 percent higher than last year, when there were just 1,632.”

So in three, individual months (May, June ’09 and June ’08) we’re talking about 364 business bankruptcies in one 9-county area. Is it any wonder that personal bankruptcies in that area were 56 per cent higher this June?

A July 13 report from Missouri says that reorgs and liquidations have risen 20 per cent from last year’s levels. Sheila Collins bought her granite-supply business in 2006 from the founders–when they were going through a bankruptcy reorganization. In February, Collins sold the assets back to the founders and filed Chapter 7 personal bankruptcy for herself in June.

Apparently, she was not bad at business: “She was one of the finalists for Springfield Business Journal’s 2008 Economic Impact Awards’ Entrepreneur of the Year, and her company was named 2008 Supplier of the Year by the Home Builders Association of Greater Springfield,” says the SBJ article.

But, her main clients were residential builders.

And here’s a takeaway, not limited to discussion of the economy: “Ted Tinsman, a bankruptcy attorney with Springfield-based Smith, Montgomery & Associates Attorneys at Law, has seen several cases similar to Collins’, and he points to reasons that aren’t directly tied to the recession.

” ‘A lot of people are using personal credit for the business when the business is not viable,’ Tinsman said. ‘When I do a case for someone who has closed their doors, there’s usually personal debt fallout where they’ve used their personal credit to fund business activities. That’s not just with this recession–that’s the No. 1 mistake I see people make.’ ”

This is no isolated case, and it’s restricted to the home building industry. The article also points out that “figures for the Springfield district of the U.S. Bankruptcy Court for the Western District of Missouri show total filings in 2008 were up nearly 29 percent compared to 2007, and up 83 percent since 2006.

“Through May this year, bankruptcies in the Springfield district are up 20 percent to 1,212 filings compared to the first five months in 2008.”

One bankruptcy attorney mentioned in the article “also noted that the increase in bankruptcy filings is more noticeable, at least in his office, among businesses than among individuals.”

A similar trend is showing up in Kern, California, northeast of Bakersfield, where personal bankruptcy filings are up an astonishing 92 per cent “in the 12 months ended March 31 as compared with the same period a year before, court records show,” according to a July 4 report.

“Bankruptcy lawyers say the problem reflects an avalanche of financial trouble, from the mortgage crisis to layoffs to changes in lending practices to insufficient health insurance.”

Elsewhere the article says, “Discussions about what’s behind those numbers typically touch on the housing market and credit card company practices.”

But the article also points out that many people have lost jobs, and others have been furloughed or had their hours cut.

And at least one attorney notices a trend: “Bakersfield bankruptcy lawyer Cindy Scully said she has noticed a shift over about the past year.

“Fewer people are filing for bankruptcy protection because they were hurt in the housing bubble, and more are filing because their work hours were cut.

“Scully said she worries that the effects of the filings will continue to ripple through the economy.

“ ‘That all has a trickle-down effect, you know?’ she said.”

Online resources: intro to Chapter 7, click here;  intro to Chapter 13, click here; refinancing and loan modification, click here; bankruptcy laws in your state, click here.