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Commercial bankruptcies soar, reflecting widening economic woes

Tony Pugh | McClatchy Newspapers

July 19, 2008 05:01:14 PM

WASHINGTON — Driven by a sour economy and skittish consumers, U.S. business bankruptcies saw their sharpest quarterly rise in two years, jumping 17 percent in the second quarter of 2008, according to an analysis by McClatchy.

Commercial filings for the first half of 2008 are up 45 percent from last year, as the national climate for commerce continues to deteriorate amid rising energy and food costs, mounting job losses, tighter credit and a reticence among consumers to part with discretionary income.

From April through June, 15,471 U.S. businesses called it quits, according to data from Automated Access to Court Electronic Records, an Oklahoma City bankruptcy management and data company.

States that saw the biggest increase in filings were Delaware, Montana, Oregon, Maryland and Connecticut, suggesting that the economic gloom is spreading beyond large population centers.

It was the 10th straight quarter that business bankruptcy filings have increased. Nearly 29,000 companies filed in the first half of 2008.

Another 60,000 to 90,000 others probably have closed, because roughly two to three businesses fold for every one that files for bankruptcy, said Jack Williams, resident scholar at the American Bankruptcy Institute.

The vast majority of these failed companies are among the nation’s 23 million small businesses, with fewer than 100 employees. Their fortunes have tumbled as the national economic downturn has deepened.

“The climate is turning desperate for small businesses,” said George Cloutier, founder of American Management Services, a consulting firm that helps small companies increase profits. “They are in crisis, and, as these numbers show, it’s getting worse and worse.”

Larger enterprises typically have more capital to weather downturns, but many of them also are reeling from the sputtering economy.

“I’ve been doing this for 36 years, and this is clearly the worst I’ve ever seen,” said Harding Dawahare, the president of the Lexington, Ky.-based Dawahare’s clothing store chain, which employs more than 400 people.

It was 1907 when Dawahare’s Syrian immigrant grandfather, Serur Dawahare, began packing his mules with bags of fabric and linens and peddling his goods door to door to coal miners in Eastern Kentucky.

From those modest beginnings, Dawahare’s grew to a 32-store clothing chain with outlets throughout Kentucky and a few stores in Tennessee and West Virginia.

However, Harding Dawahare did the unthinkable recently and filed for bankruptcy after amassing more than $9 million in debts. He said his problems began after a tough year in 2006, but it was the 2007 holiday season that did him in.

“We had a great third quarter, but if you don’t have a good fourth quarter, you’re not gonna make it. And that’s essentially what happened. The economy tanked in late November and it never came back, and we just couldn’t overcome it.”

More than 20 percent of the newly shuttered businesses were in California, which logged 3,141 bankruptcies in the second quarter.

Texas fielded the next highest number of bankruptcies with 1,168, followed by Michigan with 702 and Florida with 635. New York was next, with 618 petitions, and Colorado had 547.

Commercial bankruptcy filings reported by Automated Access to Court Electronic Records are typically higher than official government figures due to a more thorough reading of the petitions.

Robert Lawless, a law professor at the University of Illinois and a bankruptcy expert, has researched and written about the federal government’s underreporting of business bankruptcies. He estimates that roughly one in seven people who file for consumer bankruptcy do so in connection with their businesses.

Tom Clements’ pet shop in Tampa, Fla., started seeing steep declines in business in April of last year.

“We didn’t know what it was at the time, so we were trying to work through it,” Clements said.

But as sales stayed flat for the next 15 months, Clements, 62, realized that the economy was forcing customers to make tough choices. “Obviously a puppy isn’t something that everybody has to have.”

With listed assets of about $2,605, Clements filed for Chapter 7 bankruptcy in June, owing more than $260,000 for back taxes, a property lease, auto leases, unpaid inventory, dog food, phone service, advertising, pest control, waste removal and other services.

“I absolutely loved that business,” Clements said wistfully. “It’s the kind of business where people were happy. You come, get a puppy or a dog, you go home happy. Unfortunately, I’m not a philanthropist.”

Clements said the lingering debt and the money he invested had jeopardized his and his wife’s retirement.

“That’s why I wouldn’t ever consider going back into something like that again,” he said.

Williams of the bankruptcy institute said that because bankruptcies were lagging economic indicators, they probably would “continue to increase at least for the next year to 18 months at the rate that we’re seeing right now.”

Cloutier wants the federal government to create a $10 billion emergency-loan fund to help struggling small businesses avoid bankruptcy. Williams is skeptical.

“I think most of the business problems are not simply market-driven, they’re operational. So there’s a mix. Throwing more money at a poor operation means you just spent more money, but the operation is still poor.”

Jodi and Steven Carbaugh of Waynesboro, Pa., ended up in bankruptcy court after they tried to expand their Cupo’ Joe coffee shop in Greencastle, Pa.

In 2006, the couple used their home as collateral to buy a nearby Amish-owned bakery. “Big mistake,” Jodi Carbaugh said.

As their debt increased, the couple tried to juggle four business-related loans and their home mortgage as well as pay vendors, employees, utilities and insurance. At the same time, business at the coffee shop began to slow.

Some 70 miles outside Washington, the Cupo’ Joe was a favorite morning launching pad for residents who drive to work in the nation’s capital. But as gas prices increased, Jodi Carbaugh noticed that business began to wane, falling 40 percent since last year.

“People had to spend more money to buy gas to get to D.C. instead of buying lattes and specialty breads,” Carbaugh said. At the same time, food prices spiked. A case of eggs tripled to $60 and a 50-pound bag of flour went from about $20 to more than $50.

“The price of goods increased so drastically that we couldn’t ask folks to pay what it cost to make the products,” Carbaugh said.

Their fortunes bottomed out in June, when they filed for Chapter 13 bankruptcy protection.

“We worked as hard as we could for as long as we could,” Carbaugh said of their failed ventures. ” . . . Some of life’s lessons aren’t so easily learned, but we learned our lesson.”