Changes in Business Bankruptcies

Much attention has been paid by the media and others to the recent rapid rise in consumer bankruptcis. But less attention has been paid to the even faster rise in business bankruptcies. Recently, John Golmant, a statistician in the Statistics Division of the Administrative Office, examined the numbers behind the increase.

In 2009, a total of 1,402,816 bankruptcy petitions were filed in the federal courts, an increase of 35 percent from the 1,042,806 filed in 2008. The 2009 total marks the greatest number of bankruptcy filings since 2005, the year the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA) was passed and implemented.

Filings by debtors with predominantly non-business (consumer) debts—those incurred for personal rather than business needs—totaled 1,344,095, a 34 percent increase over 2008. Filings involving predominantly business debts totaled 58,721, a 52 percent increase over 2008. In fiscal year 2005, the last full year before BAPCPA took effect, a record 1,782,643 bankruptcy petitions were filed (1,748,421 consumer filings and 34,222 business filings). While overall monthly filings exceeded 100,000 in each month throughout fiscal year 2005, they plummeted to less than 15,000 in November 2005. However, overall monthly filings have been steadily increasing ever since. In fiscal year 2009, the number of consumer filings was still 23 percent below 2005 levels, but the number of business filings was 72 percent above 2005 levels.

The Bankruptcy Code (title 11 of the U.S. Code) is broken into chapters—each of which describes a facet of the federal bankruptcy law. Chapter 7 provides for "liquidation" (i.e., the sale of a debtor’s nonexempt property and distribution of the proceeds to creditors). Chapter 11 provides for reorganization (or planned liquidation) under a plan, normally proposed by the debtor and submitted to the court. It usually involves a corporation or partnership, but individuals can also seek relief in Chapter 11. Chapter 12 refers to debts of a family farmer or family fisherman. Chapter 13 provides for adjustment of debts for an individual with regular income, usually over three to five years.

Figure 1 shows monthly business filings by Chapter (excluding Chapter 12). It demonstrates that business filings surged in 2009, especially Chapter 11 filings. Chapter 7 (debt liquidation) filings comprised the largest percentage of business filings and increased 51 percent. Chapter 11 (debt restructuring) filings grew a remarkable 69 percent. Figure 1 also indicates that monthly business filings are now roughly twice what they were before the implementation of BAPCPA.

Figure 2 highlights the period during 2009 when Chapter 11 petitions surged. Chapter 11 filings grew rapidly during March and April, and much of the rise (44 percent) occurred in the three districts that typically handle the most Chapter 11 bankruptcies—the District of Delaware, the Southern District of New York, and the Central District of California. The increase can be attributed to economic problems in a variety of industries, as communications firms, real estate companies, retail malls, automotive companies, and construction companies all filed large numbers of Chapter 11 petitions.

Figure 3 shows that business petitions, as a percentage of total bankruptcy filings, have doubled since the passage of BAPCPA, perhaps suggesting a shift in filing patterns. Business filings have not played as significant a role in the bankruptcy courts since the early 1990s, when overall filings were below 1 million. The increases may be related to continuing economic weakness—as evidenced by high unemployment and by continued instability in the housing market in many regions of the country—but the impact of BAPCPA cannot be ignored either. The 2005 Act was aimed primarily at debtors who file consumer bankruptcy petitions, and it disproportionately affected the number of consumer bankruptcies filed post-BAPCPA. Both consumer and business filings dipped following the implementation of BAPCPA, but consumer filings dropped more severely, and the growth in consumer filings has been much slower than that of business filings. If the economy improves, it remains to be seen whether the current higher ratio of business filings will persist.