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US bankruptcies rise in 2009

Editorial Staff

The USA lumps all kinds of insolvency proceedings under the single heading of "bankruptcy" and so its headline figures are misleading. But behind the headline figure - that there was a near-30% increase in 2009 as against 2008 - there are some trends that indicate a deep malaise in the US economy - and signs that there's still a long way to go before bad debt has returned to actuarially acceptable levels.

Last Friday four US banks went bust, two of them so badly that no other bank would take them over even without paying a cent for them.

Like many other US banks that have failed in the past two years, the four that failed last Friday were small banks - serving local communities, having one or a small number of branches. Why do such banks fail? First, bad debt; secondly lack of access to capital - just the same as any other small business.

It's strange to think of banks as a small business but in the USA many of the remaining 8,000 odd banks employ a handful of people and, like the corner shop, serve ordinary people with ordinary problems arising out of ordinary lives.

It's those people that have fallen into bankruptcy in the US by the bucket-load during 2009.

The US Courts system has released its figures for the whole of 2009 and they make dismal reading. There is a theory that high levels of insolvency is the business sector's way of pruning out the dead wood so the remainder of the plant can grow. And there is a theory in bank accounting that it's better to make a defaulter bankrupt and crystallise the liability in the bank's books than to have the uncertainty over a will-he, won't-he pay situation. There is even a theory that it's in the best interests of the defaulter to obtain a bankruptcy order so as to give him a clean start - something that has translated into the concept that the most successful businessmen in the US have been bankrupt three times on the way. That's patently not true.

The figures give cause for concern that business-failures have not peaked and that there will be an increasing trend in failures as 2010 passes. That is in line with the views previously expressed in ChiefOfficers.Net.

Why do we see that concern? It's because the figures show, according to the US Courts Service "the majority of bankruptcy filings involve non-business debts." The hard numbers show a disturbing figure: in2009, they totalled 1,412,838, up 32 percent from the 1,074,108 non-business bankruptcy filings in 2008.

Chapter 11 - Administration / Restructuring, individuals, firms or corporations - saw a 50% increase in orders - but the total number is tiny: only 15,186 in 2009.

Chapter 12 - Family farmer or family fisherman went up by 58% - but the total number is insignificant - 544 in 2009.

It's the total collapse chapters that carry the brunt: Chapter 7 - liquidation - individuals, firms or corporations and Chapter 13 - a form of voluntary arrangement for those individuals with a regular salary.

Chapter 7 filings increased by 41% to a 2009 total of 1,050,832; chapter 13 were up what appears to be a modest 12% to 406,962.

Chapter 13 is especially attractive to debtors because it both protects a property from repossession and it protects co-signatories or guarantors against losing their homes or assets. So why was their such a disparity between the growth rates under Chapter 7 and Chapter 13?

Chapter 13 can is available only to those who have a job and a regular salary and can demonstrate an ability to keep current debt under control and pay existing debt - or a proportion of it as approved by a Court - by instalments over a period not exceeding five years. As unemployment accelerated, more people fell out of eligibility. But for those that have no assets to lose, Chapter 7 provides a quick escape route with an bankruptcy order being released after just four months plus 60 days, according to the Courts Service guidelines.

Chapter 11 is also a way of getting court approval for a repayment plan - in this case for businesses with the intention that the business will find a way to continue.

The report deals only with cases in Federal Court: many states have their own insolvency regime and cases under state laws are not included.

The Courts service says "The great majority of cases filed under Chapter 7, however, are "no assets" cases, in which the debtor has no assets available for distribution to creditors." In short, by the time the action is taken the situation has reached rock bottom.