The filings fell 14.8 percent—slightly more than they fell in the previous 12-month period, when they dropped 14.3 percent. Business bankruptcies had skyrocketed 62.7 percent in 2007 and 2008, then rose another 8.3 percent in 2008 and 2009. They peaked in 2009 and 2010, with 59,608.
Good News, Bad News
The number filed in 2011 and 2012 (44,435) is still above the 2007 and 2008 level (33,822). Personal bankruptcies, in which debts are mostly personal or consumer, also fell 14.2 percent in the past 12 months to 1.27 million. This is still well above 2007 and 2008's 934,009, but down from the peak of 1.5 million in 2009 and 2010.
But combined business and personal bankruptcies rose from the first quarter to the second quarter of 2012, to 32,563. The good news, however, is that number is still 14 percent lower than that of the second quarter of 2011. (Historically, second-quarter bankruptcies are higher than those of the first quarter.)
The Chapters Explained
For businesses, Chapter 7 is far and away the most popular type of filing, mostly because it's cheaper. It constitutes 70 percent of all filings, and fell 16 percent to 914,015 from the 1.1 million filings in the period that ended June 30, 3011. Chapter 13 filings, which account for 29 percent, fell 11 percent. (Chapter 12 is only for farmers or fishermen. It makes up the tiniest fraction of bankruptcies, with fewer than 600 filed this year.)
Why is Chapter 7 so much cheaper than a Chapter 13 or Chapter 11 bankruptcy? It’s the quickest and least complex—and therefore the cheapest. 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 13 lets debtors keep assets such as cars and homes, but often they can’t stick to the repayment plan and so the expense and the time is all wasted when they then have to convert to Chapter 7.
Chapter 11 is the most expensive of all—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. “Even 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.”