Debt-laden consumers and businesses filed for bankruptcy at a record clip last year, leading to a 19% hike in total bankruptcy filings, according to a report released Tuesday. And analysts believe filings may hit even higher levels in 2002.
The increased levels of spending and debt racked up during the 1990s by consumers and businesses, combined with the decrease in personal savings and the recession that began last year "created something of a 'perfect storm' from a financial standpoint," said Jack Williams, professor of bankruptcy law at Georgia State University College of Law.
"Any combination of those would have increased bankruptcy filings, but when they all came together, it caused bankruptcies to rise at a tremendous rate," he said.
Compared with 2000, total bankruptcy filings increased 19% last year to 1.49 million, surpassing the previous high of 1.44 million set in 1998, according to the Administrative Office of the U.S. courts. Personal bankruptcies rose 19% to 1.45 million, while business bankruptcy filings rose 13% to 40,099.
The corporate bankruptcies were notable not just for their number, but also for their size, Williams said. Ten Fortune 500 companies and 22 Fortune 1,000 companies filed for protection from their creditors in 2001, Williams said.
"When you go behind the numbers, not only do you see big increases, but we see a significant change in the profile of the companies," he said. "It's not just Joe's Hardware."
When big companies file for bankruptcy there's a ripple effect felt by smaller companies that provide supplies and services to the company, as well as by the corporation's employees. However, that ripple effect is not immediate, Williams said.
Typically, consumers use up their savings, sell assets and borrow from relatives and friends for six to nine months before they finally succumb to bankruptcy, he noted.
Because the ripple effects of relatively recent filings by big companies such as Enron Corp. and Kmart Corp. haven't been felt yet, many experts believe the bankruptcy rise is far from over.
A January survey of bankruptcy attorneys found that 94% of those surveyed believed that bankruptcies would continue to rise this year, said Samuel J. Gerdano, executive director of the American Bankruptcy Institute in Alexandria, Va.
Bankruptcy Court filings are likely to increase even though the economy has shown some signs of life recently.
