Bankruptcy Filings Hit Record Level
Strapped by the slumping economy and spooked by a looming change in the law, Americans filed for bankruptcy in record numbers in the second quarter, according to data released Friday.
The Administrative Office of the U.S. Courts said personal and business bankruptcies totaled 400,394 from April to June, a 9% increase over the first quarter and an almost 25% jump from the same period last year.
Experts have been predicting bankruptcies will be on the upswing this year as the U.S. economic slowdown puts the bite on consumers and companies alike. Bankruptcy filings last peaked in the second quarter of 1998, at 373,460.
But the scale of the surge still surprised some. “It’s borderline shocking, actually,” said Sam Gerdano, executive director of the Alexandria, Va.-based American Bankruptcy Institute.
Bankruptcy filings are on track to surpass the record-breaking year of 1998, when 1,442,549 cases were filed, Gerdano said.
Personal bankruptcy filings totaled 390,064 in the second quarter, up 24.8% from the 312,486 recorded in the year-earlier period. Business bankruptcies rose a more modest, but still hefty, 11.8% to 10,330.
Buoyed by the longest economic expansion in U.S. history, consumers binged on debt over the last decade and are facing the consequences as the boom wanes, Gerdano said.
“We’re in the purge phase now,” he said. “The bill is coming due, and it’s coming due at the same time that we’ve had half a million people lose their jobs.”
Added to that, Congress is closing in on final approval of long-delayed legislation that would significantly tighten bankruptcy laws, apparently spurring some debtors to seek relief before it becomes harder to do so.
“That’s probably part of it,” Gerdano said. “It’s hard to measure, but it’s in there.”
The legislation would bar debtors judged able to repay some of what they owe from filing Chapter 7 bankruptcy, which allows unsecured debts, such as credit card bills, to be wiped out.
Instead, those with income of $100 or more a month after living expenses would have to file under Chapter 13 and repay their debts over five years. About 75% of personal filings in the second quarter were under Chapter 7.
The overhaul easily passed the House and Senate this year. Their two versions must still be reconciled before the legislation can go to President Bush, who supports the effort.
In the 12-month period ended June, bankruptcies rose 8.6% to 1,386,606 from the previous period. Personal filings rose 8.8% to 1,349,471, and business filings edged up 0.6% to 37,135.
On the corporate side, an anemic economy and ripple effects from the troubled technology and telecommunications sectors have pushed business failures higher for two straight quarters, and more are likely on the way, experts said.
“Anyone in the bankruptcy business thinks the debate over whether we’re in a recession is academic,” said Evan Flaschen, a bankruptcy attorney at Bingham Dana in Boston. “We just see large company after large company in trouble, with no short-term end in sight.”
Business bankruptcies fell by an average of 13% annually from 1997 to 2000 as the economic boom and easy bank credit kept companies afloat, according to economists at Moody’s Investors Service.
But companies that piled on debt for expansion stumbled when banks tightened lending and expected demand failed to materialize, making further failures likely--particularly in the technology area, said Moody’s economist Kamalesh Rao.
“You’re seeing a classic case of incredible oversupply in the tech area, juxtaposed with a slowing economy,” Rao said. “It’s going to take a while to clear through.”
