Bankruptcy filing statistics reveal that the number of business bankruptcies is falling. However, that is no reason to rejoice as it in no way indicates that the economy is doing well. The depression hit the United States in late 2007 and has continued to maintain its stranglehold on the economy even as we enter 2012.
Until 2007, property prices were high and people were living in a bubble, spending unrealized profits. Every other American went entrepreneurial and set up a business. Once the property crash hit, the bubble burst and the blood started to flow. The number of businesses that went bankrupt in 2008 was very high. In the post-2008 era, not many people had the courage to start a new business because they realized that the economy would take more time to recover.
The number of new businesses began to shrink. As the number of new businesses started shrinking, the base shrunk as well. This is why people should not be fooled by bankruptcy filing statistics. The statistics show that fewer businesses filed for bankruptcy but that is not because the economy is doing well – it is because many businesses have already filed for bankruptcy and not many new businesses are being set up.
Another scary statistic that emerges after analyzing business bankruptcy filings is that the number of Chapter 7 bankruptcies is more than Chapter 11 bankruptcies. Chapter 7 bankruptcy is business liquidation – the court takes possession of the business’s non-exempt assets, sells them and divides the proceeds amongst the creditors in order of their priority. Once the Chapter 7 process is complete, the business ceases to exist.
Chapter 11 bankruptcy is business reorganization. It grants a business more time to repay its debts so long as the majority of the business’s creditors approve its reorganization plan. The company then has to repay its creditors as per the reorganization plan over an extended period of time. Once the plan is executed, the company becomes free from the debts which it sought protection from and emerges once again as a healthy concern. So, if you read between the lines of bankruptcy filing statistics you will notice that there is pessimism in the air. Many businesses are filing for Chapter 7 and not under Chapter 11. This means that the majority of those filing do not see any future in continuing.
Bankruptcy is a complex process and in particular, Chapter 11 takes a long to complete. So, if your business is distressed, consult an attorney and know the different options available before filing for a bankruptcy.
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