A Projected Cost of Easy Credit: 1 Million Bankruptcies This Year

WASHINGTON - Essay credit from banks and profligate spending by consumers and businesses will result in a record one million bankruptcy filings this year, the American Bankruptcy Institute predicted Wednesday.

"The main culprit for this |bankruptcy boom' is not the current economic downturn," said the institute's executive director, Samuel J. Gerdano. "Larger banks, auto dealers, home equity [lenders]-all created too much credit in the 1980s."

Almost six million consumer and business bankruptcies have been filed since the Bankruptcy Code of 1978 went into effect on Oct. 1, 1979.

Upward Spiral Continues

The number of filings set new records in each of the last 10 years, ranging from 360,329 for the year ending June 1981 to 880,399 in the year ending June 1991. The projection of one million applies to calendar 1991.

The New England region is feeling the brunt of the bankruptcy trend. In New Hampshire, bankruptcy filings soared 86% to 3,414 in the year ending June 1991. They were also up 71% in Massachusetts to 12,942, 77% in Rhode Island to 3,076, and up 59% in Connecticut to 6,916.

Consumers, who represent the growth area of bankruptcy, comprised the vast majority of the 880,000 filing from June 1990 to July 1991.

Filings by businesses under Chapter 11 of the bankruptcy code peaked in 1987 at 22,564 cases and then declined 22% to 19,591 in 1990, the institute reported. However, according to the institute's data, Chapter 11 filings spurted back to 22,491 in the year ending June 1991.

Growing Complexity

But the business bankruptcy cases that are being filed are bigger and more complex than those of the past.

"The size of insolvent companies had grown fifty-fold over a decade earlier, resulting in increased risk for lenders, tightened credit for borrowers, and a sharp rise in the legal costs associated with complex business cases," according to Charles M. Tatelbaum, a bankruptcy institute vice president.

"Most of the big corporate failures of the 1990s are direct descendants of the corporate debt binge of the 1980s," Mr. Tatelbaum told a press briefing.

In 1980, $1.7 billion in assets were held by 62 bankrupt public companies; by 1990, there were 116 public companies with assets of $82.8 billion in bankruptcy, Mr. Gerdano said.

Mr. Tatelbaum, who is a bankruptcy lawyer in Tampa, Fla., said the unraveling of leveraged buyouts of the 1980s could hurt the banks that financed the deals.

Some of the companies acquired through leveraged buyouts are trying to restructure their debt in the bankruptcy courts because banks are refusing to lend any more money, Mr. Tatelbaum said.

"The banks today are unable to lend the money" because examiners are tougher and capital requirements are higher, he said.

The result, he said, is a trend toward prepackaged bankruptcies in which all the creditors agree to take just a portion of what they are owed. Creditors tend to settle because they are faced with "cramdowns" if the case goes to court. In a cramdown, a bankruptcy judge may force creditors to take less than what they are owed.

Lawsuit Alternatives

But Mr. Tatelbaum said other creditors, such as suppliers to the bankrupt company, may decide against settling and instead sue the banks that financed the buyout. The creditors could claim that the bank ought to have known that the leveraged buyout would not work. Mr. Tatelbaum said.

The result could be a subordination of banks' claims against the bankrupt company.

Bankruptcy courts are swamped: While filings doubled in the 1980s, the number of bankruptcy court judges increased only 25%, according to the institute, which bills itself as a source of definitive data on bankruptcy and insolvency. Most of its funding comes from the legal community.

On average, it takes almost 22 months from the time a bankruptcy is declared till the time it is settled, the institute said.

PHOTO : Consumer Debt Mounts Debt as percentage of personal income Source: American Bankruptcy Institute

Subscribe Now

Access to authoritative analysis and perspective and our data-driven report series.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.