First Quarter Numbers of Filings for Bankruptcy Protection at Record Highs

How Does Entering Bankruptcy Protection Affect the Economy?

The Ritz Camera and GM bankruptcy filings soured economy watchers on the fiscal state of the union. First quarter record filings for bankruptcy protection paint an equally bleak picture.

Numbers of Consumers and Businesses Filing to Enter Bankruptcy Protection at a Record High

The numbers provided by the American Bankruptcy Institute are bleak. In the first quarter of 2010⁽¹⁾, a record 373,541 non-business entities have asked for bankruptcy protection. This is comparable to the economic upheaval of the first quarter in 2002, when filings reached 369,237.

The numbers of businesses that asked to enter bankruptcy protection are equally bleak. The first quarter of 2010⁽²⁾ saw 14,607 filings, which is the highest number of any first quarter business bankruptcies since 1994. While the numbers of non-business filings are arguably not a sign of the apocalypse, the fact that they are coupled with record numbers of business bankruptcy protection filings is upsetting.

The Goal of Bankruptcy

In addition to stopping creditor calls, consumers and businesses ask for bankruptcy protection to re-evaluate their fiscal positions and let go of assets that could be used to satisfy some debts. Thus, in theory, bankruptcy filings should help the economy simply because more assets are being put up for sale and more debts are being paid with the profits.

In reality, personal bankruptcies leave unsecured creditors - usually credit card companies and private debtors - holding the bag. Business filings are just as damaging to stockholders⁽³⁾, whose losses are not considered until after secured and unsecured creditors' claims are paid.

This frequently leaves the latter with useless paper, as there are often no assets left to satisfy any claims. Bondholders are not much better off, even though they may receive a fraction of the face value listed on the bonds.

Connecting the Dots
The Ritz Camera bankruptcy filing affected 300 stores, while its affiliate Boaters World was set to closed up shop altogether. It stands to reason that skyrocketing business bankruptcies go hand in hand with personal filing.  Take for example the 12,798 fourth quarter requests for bankruptcy protection that businesses filed in 2005; it is matched with 654,633 non-business filings in the same period.

As it stands, only a strong commercial recovery that drastically lowers the number of businesses hoping to enter bankruptcy protection will also reduce the need for non-business filings.