The bankruptcy ledger

Bankruptcies have been soaring, and at the same time the Supreme Court has required changes in the bankruptcy courts set up by the 1978 bankruptcy reform law. While Congress sorts things out, both the American people and their representatives need some perspective on headlines about business failures and legal chaos.

In simplest terms, the situation is bad but not as bad as comparisons to depression days of the 1930s might suggest. Among the factors:

* The numbers of failures have to be seen in the light of an economy that is enormously larger than in the '30s. The real gross national product, for example, is seven times higher.

* The numbers of Americans thrown out of work have to be seen against an economy providing employment for far more than before. In 1933, 43.5 percent had a job. In 1981, 58.3 percent had a job. According to such figures, 25 million more Americans would have to lose their jobs to return to depression levels.

* The firms that go bankrupt have to be seen in relation to laws making bankruptcy a more inviting alternative than in the past. The reform act's Chapter 11 facilitates reorganization with management still in place. Even the terminology has been changed to remove some of the onus, with the ''bankrupt'' becoming the ''debtor.''

* The companies going out of business have to be calculated along with those starting up in business. More than twice as many businesses began in 1981 than even a decade earlier. Incorporation figures do not necessarily mean the start of brand-new businesses, since new incorporations are often entered into by established firms for tax purposes. But the number of incorporations in 1981 was more than 580,000, up 9 percent from the year before.

To keep such factors in mind is not to minimize the other ones in the bankruptcy equation. These include the 66,259 filings for business bankruptcy in 1981, according to federal bankruptcy court records, compared to a total of 30, 130 at the height of the previous recession in 1975. From January through May this year, the total was 31,627, up from 28,418 last year.

To take another set of figures, failures that cause loss to creditors are found to be occurring at an annual rate of 80 per 10,000 companies, on the way toward 1933's 100 per 10,000. And economists calculate that there are many more business terminations for every one reported in such figures.

Among those who file for bankruptcy, four-fifths file simply for liquidation, with assets auctioned off and all jobs eliminated. Businesses of many kinds are affected, with this year's casualties in manufacturing, services, and wholesaling rising by more than 50 percent over the same period last year, while 37 percent more retailers have failed.

The effects are not only on the given company and the present situation. The reduction in capacity can prove a problem when more capacity is needed in the future. The construction industry has been cited as one example. When a small lumber mill closes now, it may not be noticed. But should housing revive, prices could go up because this source of supply would be missing.

In short, perspective, yes; complacency, no.

Congress is hardly inclined to provide additional subsidies to keep businesses from going bankrupt. The answer lies in a revival of the economy to bring interest rates down and encourage purchase of the goods and services companies have to offer. The role of high interest rates may be exaggerated in their direct effect on business, where they ordinarily constitute a much smaller part of sales than does the cost of labor, for example. But they are part of a cycle in which buyers are reluctant to buy, inventories suffer, and the ripples of unemployment reach back to wholesalers and manufacturers.

Thus Congress has to go beyond considering changes in the bankruptcy act as required by the Supreme Court - and revisions in its ''liberalizing'' provisions called for by others. It can do more to save businesses by putting its own budget in order.

About these ads
Sponsored Content by LockerDome

We want to hear, did we miss an angle we should have covered? Should we come back to this topic? Or just give us a rating for this story. We want to hear from you.

Loading...

Loading...

Loading...

Save for later

Save
Cancel

Saved ( of items)

This item has been saved to read later from any device.
Access saved items through your user name at the top of the page.

View Saved Items

OK

Failed to save

You reached the limit of 20 saved items.
Please visit following link to manage you saved items.

View Saved Items

OK

Failed to save

You have already saved this item.

View Saved Items

OK