Bankruptcies have another record year -- here's why

Vermont Business Magazine, Mar 01, 1997 by Barna, Ed

For the second straight year, Vermont has posted an all-time record total for bankruptcy filings.

Eyes opened wide in 1995 when the number of petitions to the US Bankruptcy Court in Ridland, which serves the entire state, shot up from 810 to 1,044. This was a 28.9 percent increase, a total 8.8 percent higher than the previous all-time record of 960 set in 1991.

By late fall 1996; the old record had been left behind, and watchers began wondering how high the new figure could go. The new mark of 1,359 for 1996, up 30.2 percent from 1995 and 41.6 percent from 1991, seems likely to fall in turn if the January pace for filings continues through 1997.

"Do you have a calculator?" asked bankruptcy lawyer and trustee Raymond Obuchowski of Bethel. By January 16, 1997, there had been 82 filings. Divide 16 into 365 days, multiply 82 by 22.81...1,870 filings?

"I gave up being a prognosticator," said Obuchowski, who has weathered 15 years in the bankruptcy field and was at one time was law clerk for former bankruptcy court Judge Charles Marro. "I was absolutely amazed there were that many people who could go bankrupt in the state of Vermont."

"I don't see if slowing down for the immediate future," said Jesse Schwidde of Rutland, a 15-year bankruptcy attorney. "I filed three petitions this week."

But was Vermont's 1996 economy really 41.6 percent worse than in 1991, at the depths of a severe recession? And is this year noticeably worse than 1996? In the court's home city of Rutland, the new record was not as heavily publicized as Mayor Jeffrey Wennberg's proclamation in early January that 1996 was a roaring economic success, which added more than a thousand jobs to the Rutland County economy.

Other figures suggest the real story behind the rise in bankruptcies is national, not regional, and involves major bank policies and the American way of dealing with credit, more than it does the health of the Vermont business climate. Figures for the country as a whole, provided by Thomas Hart, the Clerk at the Rutland bankruptcy court, show that on a per-capita basis, the number of filings per 1,000 people roughly doubled between the 1970s and 1980s, with the percentage of petitions in the 1970s very nearly twice that of the Depression-era 1930s (4.65, 9.21, 17.26 in the '80s). In the 1990s, the filing rate has been nearly double that of the 1980s.

To date, the 20th century has seen the bankruptcy petition rate escalate from 1.88 per 1,000 people in the decade 1900-1910, to an estimated rate of 31.91 for the 1990s.

Comparing states, Vermont continues to have one of the lowest filing rates in the nation, even with the recent high percentage rate increase. It is now third from the bottom of the list rather than second, with Maine having 181 households per filing to Vermont's 180, and oil-rich Alaska boasting a figure of 202.

The implication, as far as Vermont observers can tell, is that the same factors driving up Vermont's rates are operating across-the-board in other states as well.

Lawrence Ausubel, a professor of economics at the University of Maryland, is among the academicians who agree that such is the case. In a paper for the seventh annual meeting of the National Conference of Bankruptcy Judges in October (hereafter "the National Conference"), he said that "both credit card defaults and bankruptcies soared (in the 1990s) amid a generally health economy with relatively low unemployment and reasonable growth in gross domestic product."

"There has been an astonishingly tight relationship between credit card defaults and bankruptcy filings," Ausubel said. In his opinion, "two factors--the cyclical state of the economy and the extranormal profitability of the credit card industry--combine to generate the high current levels of consumer default."

In a related article, Ausubel stated that there were about 4,000 vendors of credit cards nationally, about two dozen of whom operated nationally, in the virtual absence of price controls.

"There do not appear to be any particularly strained inputs, significant sunk cost, or significant barriers to entry. Finally, there is no evidence of any explicit collusion on price or quantity," he said.

Breaking down the Vermont figures by chapter type lends further credence to the idea that consumers, not businesses, are in trouble this time around. From 1992 to 1996, the number of Chapter 7 consumer filings was as follows: 753, 666, 652, 815, 1,133. Business Chapter 7's over the same period were: 170, 115, 85, 113, 98.

To put it another way, a year that saw a 30.2 percent hike in total filings also witnessed a decrease in petitions for business liquidation of 15.3 percent. Chapter 11 reorganizations, much more typical of businesses than individuals, from 1992-1996 amounted to 28, 21, 32, 16, and 23. Chapter 13 liquidations, which allow repayment of some debt if there are assets beyond living expenses, were used by business in that period in the following numbers: 10, 8, 10, 25, 15. Chapter 12 farm bankruptcies numbered 10, 5, 7, 5, and 6, the last in a year that has seen soaring grain prices coincide with rock-bottom low beef prices.