Wednesday, August 22, 2007

Business Bankruptcy Rates Continue to Rise in 2007

This news blurb on business bankruptcy filings just arrived.

The number of U.S. business bankruptcies continues to rise in 2007, as the second quarter filings showed yet another dramatic increase in the number of businesses seeking protection from creditors, accounts receivable insurer Euler Hermes reports.

According to the U.S. Bankruptcy Courts, 6,705 businesses declared bankruptcy in the second quarter of 2007. This number shows a series of upward trends, including:
* A 7% increase over the first quarter of 2007
* A 38% year-over-year increase from the second quarter of 2006
* A 45% increase for the first half of 2007 in comparison to the first half of 2006

"Businesses today are facing serious headwinds, including a slowing economy and an increase in the cost of doing business," said Euler Hermes ACI chief economist Daniel C. North, who earlier this year forecasted a 51% increase in business bankruptcies for 2007.

North has said that the three most serious issues remain the effects of increased energy, raw material, and labor costs; the effects of monetary policy tightening by the Federal Reserve in 2004-2006; and the "decimated" housing market and its effects on consumers and businesses.

The housing market's recent effects on the financial markets have brought the seriousness of the situation to light, but North has been tracking -- and predicting -- the economic impact for nearly a year.

"What first tipped me off was when median prices on existing homes fell for 10 consecutive months on a year-over-year basis, which is an unprecedented event since house prices almost never fall; they have never fallen for more than two months in a row in the 38 years that records have been kept," he said. "This is an obvious sign of a rapidly deflating asset bubble, the effects of which will continue to be felt for some time to come."

According to the Euler Hermes business failures forecast, a return to 30,000 business bankruptcies is expected in 2007. This follows a spectacular, but one-off, reduction in business failures in 2006, when the number of corporate insolvencies dropped by 50% due to a 2005 change in U.S. bankruptcy legislation.

North said the disappearance of the impact of the change in legislation, coupled with the slowing economy and reduced profits, will bring the bankruptcy numbers to "more normal levels."

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Tags : bankruptcy , Euler Hermes , working capital , business loans

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