Small business bankruptcies declined 36 percent from the first quarter of 2010 to the first quarter of 2012—and the decline is projected to continue, according to a new study.
The Atlanta-based credit rating firm Equifax analyzed Chapter 7, 11 and 13 filings for the report. Its definition of small business was fewer than 100 employees.
"The downward trend in the number of small business bankruptcies shows continued stabilization of the market, and is due largely to the belt tightening of business owners, as well as increasing consumer confidence and spending," says Rissi Lovern, leader of Equifax's Commercial Information Solutions Risk Center of Excellence.
Metro areas in Western states still topped the list those clocking the highest number of small business bankruptcies, but they also experienced the biggest decline in filings year over year. Sacramento had the biggest drop, with a 42.25 percent decrease between the first quarter of 2011 and the first quarter of 2012. (Equifax said 323 small firms filed for bankruptcy protection in this year’s first quarter, down from 445 in the first quarter of 2011.) In the same time period, Riverside-San Bernadino-Ontario, Calif. was a close second, with a 41.27 percent drop.
Tops on the list of total bankruptcies in March 2012 (the most recent month on record) is Los Angeles, followed by California’s Riverside County. Houston was third, with 117 companies filing for protection.
Houston is an exception to the bankruptcies declining trend—the city’s is up 40 percent since March 2010.
Wayne Kitchens, the co-managing partner at the Houston law firm of Hughes Watters Askanase, told the city’s KUHF FM radio station that his firm has seen bankruptcy filings pick up since February after a slowdown at the end of last year.
He added: “But I think that it’s important to remember there’s thousands of businesses here, and Houston’s a very entrepreneurial town. People I don’t think mind taking risks here, and sometimes those risks simply don’t pay off.”
Kitchens said many small firms are unable to afford the costs of a Chapter 11 filing. They’re forced to file instead for Chapter 7—liquidation.
Why is Chapter 7 so much cheaper than a Chapter 13 or Chapter 11 bankruptcy? It’s the quickest and least complex. A debtor and his attorney don’t need to create any plan for repayment or show they can make a budget work—all they need to do is show documentation that the company is eligible to file, plus a list of assets, earnings and expenses.
Chapter 13 requires all the documentation of Chapter 7, plus a plan—usually three to five years—to repay creditors that the court has to decide is fair and possible.
Chapter 11 is the most expensive of all—with typical bills running upwards of $100,000. “Usually the majority of filings are by large business entities that can afford the expense,” says Stephen M. Trezza, an Arizona bankruptcy attorney. “Most small business cannot afford [Chapter 11.] This is because the reorganization and debt payment plan is both expensive to create and difficult to win court approval for. Added Trezza: “Because of the cost, a Chapter 11 plan should only be considered for a business or individual with sizeable assets.”
Have you had any experience choosing between bankruptcy filings, or know of any small business owners who have?
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