Business Bankruptcies on the Rise and Likely to Keep Growing

Commercial bankruptcy filings among public companies in the United States have increased more than 80 percent in the first quarter of 2008 after a long period of declines, according to data reported by various sources that track commercial bankruptcies.

Trade credit insurer Euler Hermes ACI said in a press release Wednesday that 29 publicly traded companies have filed for Chapter 7 or Chapter 11 protection in the first three months of 2008 compared to just 16 in the same period in 2007, an 81 percent increase.

It’s not just total bankruptcy numbers that are on the rise. Euler reported that assets involved in the 29 bankruptcies totaled $10 billion in the first quarter, compared to the $1 billion in total assets for the 16 bankruptcies in Q1 2007.

“The escalation in bankruptcies is a direct result of the deterioration in the U.S. economy, which is now in recession,” said Euler Hermes ACI Chief Economist Dan North.

Those thoughts were echoed by Steve Bastien, who follows distressed companies as publisher of the Credit Manager’s Weekly Summary of Financially-Challenged U.S. Companies. “I’ve been tracking troubled companies for 26 years, and I’ve never seen it as bad as it is right now,” said Bastien. “We are definitely in a recession.”

Although the business bankruptcy numbers were up sharply in the first quarter of 2008, it was only after a noticeable decline in previous years. According to BankruptcyData.com, commercial bankruptcies among publicly traded companies peeked in the first quarter of 2002 at 66. The numbers have seen a steady decline since, bottoming out at 16 last year.

Bastien says that the decline over the first part of this decade is easily explained. “First, the economy was much better from 2002 to 2006,” he said. “And then bankruptcy reform was passed in 2005, which impacted businesses as well as consumers.”

But Bastien thinks that bankruptcy filings among businesses, both public and private, will return to, and even surpass, earlier levels. And the downturn may last a while. “It’s going to take a long time to come out of this,” he said. “I’m not sure the government can bail us out here.”

North likewise commented in his research notes that “[Business] bankruptcies are likely to continue rising for the next year as the economy struggles through the recession.”