Bankruptcies Spike in 2009: Wall St. and Main St.

In an effort to deter consumers who abuse the system and recklessly run up debt and walk away without a scratch, the Prevention and Consumer Protection Act of 2005 was signed into law, comprised of higher bar for determining eligibility to file, and higher fees. The act also extended the 7-year abatement over before filing a second time to 8 years, as well as mandatory credit counseling and debt management workshops. On average, bankruptcy filing in the United Stated was as much as 1.1 million, but it was widely believed that tougher bankruptcy laws would bring that number down significantly. No surprise that there was a spike in consumer filings prior to the passing of the law in October of 2005 , which clearly indicated consumers were rushing to file to avoid having to deal with the tougher laws. Although stats showed a slight dip in filings, it was short lived. The recession, which we now know really started as far back as 2007, fueled a steady increase in bankruptcy filings. By the first quarter of 2009 consumer bankruptcies were up as much as 32 percent.

For corporations, the story isn’t much different. In 2008 corporations filing for bankruptcy increased 74% over the previous year. To make matters worse, 2009 was also a horrific display of corporate carnage with 249 public corporations filing some form of bankruptcy. Eighteen percent of those companies who filed for bankruptcy did so as a pre-structured package. It’s likely that pre-structured bankruptcies are viewed less pessimistically by shareholders and creditors. So it should be no surprise that industry analysts and rating firms such as Moody’s and Standard and Poors view structured bankruptcies more positively as well. Therefore, public corporations see this as a proactive step toward damage control. It’s the corporate strategy that neutralizes negative perceptions, while buying time for them to dig out of the financial ditch. This also explains why structured bankruptcies spiked up 300% on the past 24 months.

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- K. Reilly
Cohn-Reilly Report / Articles