By Liz McKenzie
Law360, New York (September 10, 2008) -- With the credit crunch and mortgage crisis continuing to impact businesses nationwide, Chapter 11 filings have skyrocketed to a new high for the month of August.
Last month, Chapter 11 filings increased by 38 percent to 1,082 filings, up from 786 filings in July, according to an Automated Access to Court Electronic Records report.
The August numbers mark a significant departure from rates that have typically hovered in the range of 700 to 790 new filings per month throughout the past year.
Retailers, especially those in the mid-price range, have been hit hard by current economic conditions, which, coupled with long-term trends in the retail industry and low consumer spending, have pushed many chains to the brink of bankruptcy, said Daniel Kotchen, a partner with Kotchen & Low LLP.
You have to look at the pressures on retailers today in the context of the trends overtime in the retail industry, Kotchen said. Since 2000, there's been a trend where consumers were either trading up to the high-end retailers or trading down to the discounters. In addition to that trend, now there's a real pressure for mid-range retailers because of what's happening economically.
Last month, department store Boscovs Inc. and cookie conglomerate Mrs. Fields Original Cookies Inc. both filed for Chapter 11, following in the footsteps of other retail giants that filed for bankruptcy earlier this year, including Linens 'N Things Inc. and The Sharper Image Corp., and jewelers Friedman's Inc. and Whitehall Jewelers Holdings Inc.
Bankruptcy analysts maintain that the increase is a continuation of the overall rise in bankruptcies filed over the past year, dismissing reports that seasonal retail cycles could be a factor.
The appropriate issue is not what happened in the month of August, but where we are in the credit crisis cycle, said Jonathan Carson, president and co-founder of Kurtzman Carson Consultants, a legal consulting firm.
What were seeing is a continuation of a trend of increasing numbers of business bankruptcies, said Jonathan Friedland, head of the restructuring and insolvency service group at Levenfeld Pearlstein LLC. And well continue to see this for the foreseeable future.
The rise in Chapter 11 filings is due in part to the volatility of the credit and mortgage crises as well as a decrease in consumer spending. As dispensable income decreases, consumers are forced to cut back on non-necessary expenditures and are spending less on regular purchases, according to Carson.
One of the first things they are going to do is to stop going to Bennigans for dinner and to stop buying extra bed sheets from Linens ‘N Things, Friedland said, citing two retail giants that filed for Chapter 11 earlier this year.
Overall bankruptcy filing rates have also increased, reaching a post-2005 high of 4,476 filings per day, according AACER. The company has also estimated that, given the current rate, bankruptcy filings could easily climb to 1 million filings by the end of 2008.
The bankruptcy rate has become staggeringly high, and we appear to have returned to an era where we will have well more than 1 million annual bankruptcy filings, AACER said on its Web site.