Mish discusses Bankruptcy – past, present and future implications. – Ilene
Bankruptcy Time Bomb in US and UK Goes Off
Courtesy of Mish
Bankruptcies are soaring in the US and UK. With jobs increasingly hard to find, the Downturn Pushes More Toward Bankruptcy.
The ailing economy continues to pull more Americans into bankruptcy court, where the number of troubled consumers filing for protection soared in March to its highest level since October 2005, when a new law made it more arduous and expensive to file.
An average of 5,945 bankruptcy petitions were filed each day in March, up 9 percent from February and up 38 percent compared with a year earlier, according to Mike Bickford, president of Automated Access to Court Electronic Records, a bankruptcy data and management company. In all, 130,793 people filed for bankruptcy in March.
The weak economy and its repercussions — rising unemployment, lower pay, fewer people with health insurance, and the mortgage and foreclosure crises — are all playing a role in the big increase in bankruptcies. And some of the most common factors that tend to lead to bankruptcy filings — divorce and disruptive health problems — have not gone away.
But the biggest factor in the current spate of filings may be the tightening of credit.
“We have a lot of people out of work, but that alone is not driving the spike in bankruptcy filings,” said Robert M. Lawless, a professor at the University of Illinois College of Law. “Along with job loss is the tightening of consumer credit. Compared to 18 months ago, the American consumer does not have the same ability to borrow in an attempt to stave off the day of reckoning. With no income and no credit, it is not surprising that the middle class is looking to the bankruptcy courts for relief.”
Professor Lawless said he expected total bankruptcy filings to reach 1.45 million to 1.5 million by the end of the year, compared with nearly 1.1 million filings in 2008, an increase of 31 percent to 36 percent. It also means that filings are fast approaching the average number of annual filings of about 1.4 million before the new bankruptcy law took effect in October 2005.
I expect bankruptcy filings to exceed that in 2005 even though that total was enormous because of Hurricane Katrina on top of the new bankruptcy law.
Professor Robert Lawless is confusing cause and effect. The cause of rising bankruptcies is the difficulty in finding and keeping good paying jobs. The result is banks are tightening credit to stem credit losses. It is irrational for banks to keep offereing credit to unemployed individuals in this market.
Bankrupt Britain
The Times Online is reporting Bankrupt Britain: 340 people go bust every day
Britain is facing a bankruptcy timebomb with a record number of individuals and companies predicted to go bust this year.
Begbies Traynor, the insolvency and restructuring group, reckons more than 35,000 firms could go under this year – equivalent to more than 95 a day. The figure would be 18% higher than during the previous peak in the 1990s crash. Nick Hood at Begbies said he would not be surprised if the number rose to 40,000 by the end of the year.
Begbies forecasts that as many as 125,000 people will go bust this year – well above the 107,000 peak in 2006 – equivalent to 342 people a day. Richard Goodwin, editor of The London Gazette, the newspaper of record that prints personal and corporate bankruptcy notices, said pagination had reached a record last month – averaging 96 pages a day – up from 85 last year and 78 in 2007.
Hood told The Sunday Times: “The rate is accelerating – on a bad day we could see 20 businesses going under a day. Companies [you couldn’t imagine going bust] in the last recession are going to the wall this time round – a Chinese restaurant next to a university campus or a hairdressing salon.”
Keith McGregor, restructuring partner at Ernst & Young, said: “It is not just the number of warnings that concerns us. The tone of company statements has also darkened.
“The prospects for 2009 appear asuncertain and as gloomy as at any point in the crisis.”
The bankruptcy boom comes seven years after the Labour government tried to remove the stigma of going bust through the introduction of the 2002 Enterprise Act, which made the process much easier.
Critics claim the act created a mood of easy credit with no downside.
Time Bomb Has Gone Off
Revolving and other consumer credit that has been extended cannot possibly be paid back. That means it won’t be paid back. Thus, it’s rational for banks to curtail credit to those without a job. And the economy is losing 600,000 to 700,000 jobs a month.
President Obama’s "stimulus" plan is not likely to do much about this situation soon if ever. However, let’s assume his plan creates 3 million jobs going forward starting in late 2009. By then the ecomomy will have shed another 3-5 million jobs.
The unemployment rate is already 8.5%, up from 8.1% last month (See Jobs Contract 15th Straight Month; Unemployment Rate Soars to 8.5% for details).
The unemployment rate will easily exceed 10% by the end of the year at this pace. Counting discouraged workers and those working part time for economic reasons (a truer measure of reality), unemployment is likely to exceed 20%. Moreover, it’s important to remember that unemploment is a lagging indicator. Jobs losses will continue even after the economy starts to recover.
The credit time bomb has exploded, taking the Bankruptcy Reform Act of 2005 (Debt Slave Act of 2005) up in smoke along with it. Expect to see bankruptcy filings exceed prior records even though the 2005 total was enormous because of dual effects of Hurricane Katrina on top those filing to beat the bankruptcy law revisions.
The final analysis shows that bank attemps to make consumers debt slaves forever had its consequences, none of them any good.
