Bankruptcy filings surge to highest level in 5 years

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By Theo Frei: Subscribe to Theo's

August 19, 2010 1:15 AM GMT

Business and private bankruptcy filings in the U.S. amounted to more than 400,000 cases in the second quarter, the highest number since stricter laws took effect making it more difficult to declare insolvency.

In just 3 months, bankruptcy cases surged by 9 percent, from the 388,148 cases registered in the first quarter of 2010, according to statistics released on Tuesday by the Administrative Office of the U.S. Courts.

The previous record was registered in the last quarter of 2005 with 667,431 cases filed in federal courts. At that time, provisions of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 made it more difficult to seek bankruptcy protection and the number of cases declined drastically to less than 120,000 cases in the following quarter.

Bankruptcy filings have consistently risen again since then. For the 12-month period ending June 30, 2010, bankruptcies rose by 20 percent year-on-year to a total of 1,572,597 cases. This high and rising number of insolvent households has been caused to a major extent by persistent high unemployment.

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It is not a good sign for the economy, which is supposed to be in a recovery.

A rising number of bankruptcy cases signifies the inability by an increasing number of economic subjects to service their debt burden. While the whole point of zero-percent interest rates and expansive monetary policies was to extend the amount of outstanding credit, the escalating number of insolvent households and businesses bears the risk of a deflationary credit-bust.

This article is copyrighted by International Business Times, the business news leader
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