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Institute Predicts Record Number of Bankruptcies With BC-Bankruptcies-Years and

September 4, 1991

Institute Predicts Record Number of Bankruptcies With BC-Bankruptcies-Years and BC-Bankruptcies-States Graphic

WASHINGTON (AP) _ A record 1 million American consumers and businesses likely will file for bankruptcy this year, with the heaviest filings coming in economically shellshocked New England, the American Bankruptcy Institute said Wednesday.

″The number of bankruptcies is increasing in an unbroken line and at a record pace,″ said Samuel J. Gerdano, executive director of the institute, a non-profit group whose members include lawyers, accountants and others in the bankruptcy industry.

There were 880,399 bankruptcies in the 12 months that ended June 30, up 21 percent from a year earlier. Ninety-two percent of the filings were from individuals, the rest from businesses.

Gerdano said the pace of filings for the rest of this year should be enough to bring bankruptcies for calendar 1991 to 1 million. But, noting that bankruptcies have increased in every year since 1985, he said, ″Like a pie crust, it’s a record made to be broken.″

The biggest increases in the most recent 12-month period came in New England, the region hardest hit by the recession that began last summer. Filings rose 86 percent in New Hampshire, 77 percent in Massachusetts and 59 percent in Connecticut.

Gerdano said the recession clearly contributed to the increase, but noted that filings have risen even in years when the economy was expanding. They rose 13 percent nationally in the 12 months ending June 30, 1990, and 8 percent in the 12 months before that.

″The ultimate cause is the level of personal debt,″ he said, noting that consumers’ total debt, including home mortgages, represented 62 percent of their annual disposable personal income in 1983 vs. 83 percent in 1990.

″The only way the recession can push you over the edge is if you are already sitting on it,″ he said. ″The bankruptcy boom is here to stay unless Americans reduce debt load or the credit industry alters its practices or both.″

Consumers weren’t the only sector to go on a debt spree in the 1980s. The federal government piled up record budget deficits and businesses went on a leveraged buyout binge.

Charles M. Tatelbaum, a Tampa, Fla., bankruptcy attorney, said the ’90s could see a sharp increase in large bankruptcies as the leveraged buyouts of the ’80s come unraveled.

In a leveraged buyout, the acquiring investors borrow heavily to purchase a profitable company. After the buyout, the company has to earn a reasonable profit and enough to service the acquiring investors’ loan payments.

By their nature, leveraged buyouts require the new owners to increase profits or generate cash by selling the company in pieces. That can be an impossible task in a recession, when profits turn down and the sales price of businesses falls.

Tatelbaum said an influx of large, complex bankruptcy cases resulting from leveraged buyouts could swamp already overburdened courts, forcing individuals and small businesses into long waits for final bankruptcy determinations.

The institute wants Congress to create a commission to study the problem; a similar panel led to the last broad reworking of the U.S. bankruptcy code in 1978.

One of the reform proposals is streamlined bankruptcy procedures for small businesses so troubled companies can be reorganized quickly.

In some jurisdictions, a business can wait a year or more for a one-day bankruptcy hearing. That wait can be fatal as suppliers, customers and employees leave during the period of uncertainty.

The institute wants the House to adopt Senate-approved legislation that will increase the number of bankruptcy judges. Although bankruptcy cases have more than doubled over the past decade, the number of judges who handle them has increased by only 25 percent.

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