Bankruptcies Pile Up, Threaten Recovery

The AP claims that bankruptcies filed in the US last year totaled 1.4 million, which includes both businesses and individuals. That would be a 32% increase compared to 2008.

The Wall Street Journal reports that the National Bankruptcy Research Center has estimated 1.4 million personal bankruptcies, the most since 2005.  The association says that more people are filing Chapter 7 bankruptcies which effectively wipes out debts to some creditors.

The news brings into sharp focus the problem that the government faces as it tries to improve consumer spending through stimulus efforts and the capital it puts into the banking system. The Administration has flogged banks to offer more credit and increase loan activity. The banks fear rising write-offs as more people and businesses default on obligations.

Bankruptcies are usually viewed as a lagging indicator for the economy. That people filed for bankruptcy in the past does not mean that the rate of filings will increase in the future. That analysis is flawed. For each bankruptcy there is likely to be a lending institution that will become more cautious about offering loans in the future. For each loan that is not given, a business or individual may face solvency problems. The closing vice of poor credit availability undermines recoveries of both business and consumer spending.

If bankruptcy rates stay high early in 2010, it is a sign that a sustained economic recovery has not taken hold yet.

Douglas A. McIntyre