Despite a variety of dramatic actions by the federal government, our nation’s economic troubles may be with us for a little while longer. Recent reports show that for April of 2008, an increasing number of businesses in the United States filed for bankruptcy. That month saw 5,000 bankruptcies, the greatest number since 2005, when the latest bankruptcy laws were enacted. The bottom line? It’s not just huge corporations that are considering bankruptcy, but a growing number of small businesses, as well.

Johnson, Morgan & White has had repeated success in elevating our clients position amongst creditors seeking compensation from companies in various phases of bankruptcy filing.
This dismal financial data was compiled by Oklahoma City-based Jupiter eSources. The company’s database, known as Automated Access to Court Electronic Records (AACER), is utilized to track federal court filings for businesses nationwide. These findings show that on average, April 2007 saw 158 daily filings, while April 2008 saw 235 daily filings — a 49% increase in commercial bankruptcies. As for the reasons behind this wave of financial distress, the blame can be placed on three factors: tighter credit, higher commodity prices, and stagnant sales

An End to Out-of-Court Financial Resolutions?

Even some financial experts are shocked to find that the nation’s economic downturn is still with us. “Last year was too early to really see the problem for normal-type firms. The only people having trouble last year were hedge funds and big banks in New York City,” says William Dunkelberg, chief economist at the National Federation of Independent Businesses (NFIB). Unfortunately, many economists believe that even those organizations as yet unaffected may still be at risk in the future. “Recessions always used to clean up the inefficient firms, and that’s what we’re seeing,” says Dunkelberg.

This rise in bankruptcies represents a real change in how businesses solve their financial problems. The last decade saw an increase in out-of-court resolutions. Many home-based and unincorporated businesses have been unable to keep up with tighter consumer credit levels. Small business professionals and sole proprietors alike are using credit cards and home equity lines of credit to make payments. They’re also taking out bank loans, although these are becoming more difficult to obtain. A Federal Reserve survey conducted earlier this year focused on senior loan officers at 56 banks; more than half were found to have raised lending standards for small business borrowers.

The Role of Rising Prices
Inflation plays a large role in the nation’s lingering financial troubles. The NFIB conducted research that shows that from March 2007-2008, business owners’ concern over inflation grew from 4-12%. A large percentage of those businesses filing for bankruptcy represent the housing and home-building industries. “The number of new builders that opened up shop [in markets like Florida] was huge,” says Dunkelberg. “A disproportionate number of these bankruptcies are going to be builders or companies closely tied to the housing market.”

While the nation’s wave of bankruptcies will probably remain for the near-future, what’s surprising may be the reason for these filings. As recently as the beginning of 2008, most companies filed due to business failures. “Now it’s kind of tipped the other way, so that more often than not bad mortgage loans are the driving force,” says Cathy Moran, a Mountain View, California-based bankruptcy attorney.

http://www.businessweek.com/smallbiz/content/may2008/sb2008056_484858.htm?campaign_id=rss_smlbz

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