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Bankruptcy Trends in the Post Meltdown Era

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Bankruptcy Trends in the Post Meltdown Era

Economic dislocation is an inherent element in any financial system. One way to deal with balance sheet imbalances is to declare bankruptcy. The most common examples of liquidating default without payment are to petition the court to absolve debt obligations. Personal bankruptcy is tragic, but is common in a culture where immediate consumer gratification is the end all of a private excess society. Business bankruptcy is different because the underlying enterprise assumes all the risks of engaging in commerce. Even prudent expenditures and sound business activities can go sour that ultimately results in insolvency.

Both personal and business bankruptcies share the plight of a negative cash flow that prevent serving indebtednesses. The fault and blame may not rest on the principals of the business venture as much as the lack of discipline in consumer spending for an individual. However, the general economic climate and availability of banking resources are prime factors that affect fluctuations in Chapter 7 or 11 filings.

This election year the effects of the previous and unprecedented Federal Reserve stimulus reflect government-reporting bias. Business vs. consumers in bankruptcy filings provides the standard spin.

"Compared to 2010, business bankruptcies declined 15.1% and non-business filings dropped 11.3%, the U.S. Bankruptcy Court said.

When the recession started at the end of 2007, business bankruptcies rose more quickly than those filed by consumers, the court reported. In 2008, business bankruptcies rose 53.7% and nonbusiness filings rose 30.6%. That trend continued in 2009 when business bankruptcies rose 39.7% and nonbusiness filings were up 31.5%.

But then in 2010, business bankruptcies fell while consumer filings continued to climb."

As any consumer knows firsthand, personal credit loans are virtually nonexistent. About the only form of bank credit left to the individual is to borrow at usury rates off credit cards. Mortgage foreclosures have not subsided. Home loans are poised for another round of defaults. Most families have tightened their belt. Valiantly they attempt to reduce their debt load and lessen their monthly payments. Nonetheless, the continued persistence of high unemployment and underemployment coupled with the lack of fresh bank loan access drives more individuals into bankruptcy court.

Is this the description of an authentic recovery? Even a temporary decrease in business failures does not translate into a general economic recovery. How many private sector businesses started since the collapse of the 2008 financial bubble? Government approved and funded speculative "Green" ventures seem to be the greatest beneficiary of a propped up economy. Soon another round of massive defaults awaits public scrutiny.

Add into this environment the next segment for failure; namely, municipalities. Bankruptcy for cities reports,

"Medium-sized cities — with a population of about 75,000 to 500,000 — are more likely than in the past to file for Chapter 9, says David Dubrow, a partner in the New York office of the Arent Fox law firm and author of "The Treatment of Municipal Debt Under Chapter 9 of the Bankruptcy Code." "The [federal and state] support cities have been able to get in the past is much more limited now," Dubrow says. Also, the support states do provide is more likely to go to larger cities, he says."

It is obvious that strained and burdened taxpayers cannot fund the myriad of government pledges made over the decades to buy votes and seduce citizens into the welfare state. Small town jurisdictions have fewer options to raise taxes, than states or the federal government. Their citizens are usually their neighbors. The economic hemorrhaging that shrinks tax revenue leads to shortfalls that eventually can lead to a total default.

Since the lack of will to institute fundamental and comprehensive reform of civic spending on all levels is the operative norm, the prospects for avoiding public bankruptcies are bleak.

In an article, If a Town Can Go Bankrupt, Why Can’t the U.S.? in TIME – Moneyline the following point is made.

"Most folks now understand that defined-contribution plans have come to replace defined-benefit plans. It is perhaps the most far-reaching development in personal financial planning in many decades and represents a seismic shift away from the era of social safety nets.

What is new and shocking to many, though, is the vulnerability of our governmental bodies. They’ve reached the breaking point. They are unable to borrow enough or tax enough to make good on all their promises."

In business, the punishment of the marketplace disciplines foolish decisions. In politics, the greater the giveaway program financed with deficit spending, the longer your career in office. How can the economy grow its way out of these systemic and mathematically impossible obligations? Paying the piper now means starving the taxpayer.

The short-term trend dip in business bankruptcies has more to do with working the accounting numbers than a bounce back of a vigorous economy. As true as it is that the business sector is the more likely to repair their balance sheet before the consumer and certainly municipalities, the prospects remain strained.

As usual, the phony bank debt method of finance causes the inescapability of bankruptcy on each level. Even so, bankruptcy is the solution in the public realm. How else can the public chastise the careerist political class into relinquishing their practice of endless spending?

The fundamental causes of the Wall Street collapse just paper over the symptoms, without any meaningful closure, and will not stop the leveraged gaming practices that built the debt bubble in the first place. Small business and individual consumers paid the heaviest price of the meltdown. Big business, bailed out or rescued by mergers, continues to rape the economy.

Will government entities wear a stigma of bankruptcy proudly or will they invent even more draconic schemes to extract riches from those who actually create the wealth? You probably know the deplorable answer. As long as the controlled business marketplace is dominated by a partnership of corporatist and central government planners, the true main street economy will suffer. Embrace the insolvency of the financial debt pyramid as the resolution of the bankruptcy society.

James Hall - May 9, 2012 

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