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  • Writer's pictureBrett Weiss

Bankruptcy Filings Surge 71%

According to data collected by Epiq, July commercial Chapter 11 filings increased 71 percent over last year. You can read the article here. Total consumer filings for the past 12 months were up 10%.

This means that the economy is really doing badly, right?

Well, no.

A common misconception is that bankruptcies increase when the economy is bad. While some people file for Chapter 7 due to a poor economy, in my experience, the majority of Chapter 11 and Chapter 13 reorganization cases are filed when the economy is good. Why might this be the case?

People tend to file for reorganization when they have something to lose. Their home is threatened by a foreclosure, or a car by repossession. A tax lien or judgment threatens money in the bank. Their business is going through (or recently went through) a rough patch, creditors are clamoring for money, and there isn't quite enough to go around. And, most importantly, they have the ability, with a little time that their creditors are unwilling to give them, to fix the problem. Spreading out payments over time, lowering the interest rate or reamortizing the loan, or paying some creditors less than the face value of their claim can let people keep their homes, cars, money, and businesses.

But for this to be able to happen, the economy has to be doing well enough that the client is also doing well enough to be able to fund the reorganization. When the economy is bad, the ability to do this isn't there.

So when the economy is doing well, look for lots of Chapter 11s and Chapter 13s. They're a good sign of economic health.

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