February 17, 2011
Though total and personal bankruptcies continue to hover at record levels, business bankruptcy filings dropped noticeably in 2010. Meanwhile, a once-hot movement to allow state governments to file in an attempt to restructure debt appears to be losing steam.
The Administrative Office for the United States Courts (U.S. Courts) unveiled bankruptcy statistics for the last calendar year and found total business filings at 56,292. That is a 7% decline from CY2009. In fact, 2010 marks the first year Chapter 11 filings decreased since the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 ushered in sweeping changes when it became effective in 2006.
On the flip side, the rate of total bankruptcies, fueled by personal filings, surged 8% in CY2010. U.S. Courts said filings in 2010 totaled 1.59 million. However, it was noted that the rate of bankruptcy growth was significantly smaller from 2009 to 2010 than between 2008 and 2009. The following breakdown was provided by U.S. Courts:
- Chapter 7 filings totaled 1,139,601, up 8% from the 1,050,832 Chapter 7 filings reported in CY2009.
- Chapter 11 filings fell 10% to 13,713 from the 15,189 filings in CY2009.
- Chapter 13 filings rose 8% to 438,913 from the 406,962 filings in CY2009.
- Chapter 12 filings totaled 723, up 33% from the 544 Chapter 12 bankruptcy filings in CY2009.
Meanwhile, a movement to allow states to declare bankruptcy to get out from under crushing debts, largely caused by entitlements and/or industries impaired by the recession, is showing signs of losing momentum. In recent months, especially January, preliminary talk of legislative proposals to allow state bankruptcy filings was getting solid ink time because of political muscle behind the concept, which included former House Speaker/rumored 2012 presidential hopeful Newt Gingrich and New Jersey Governor Chris Christie, both Republicans.
However, such talk cooled when several heavy-hitting congressional Republicans, like the vast majority of Democrats, largely dismissed state bankruptcies as an option. All but one panelist brought before the GOP-headed House Oversight and Government Reform subcommittee hearing last week characterized such a move as an unlikely panacea for state-level fiscal issues.
Iris Lav, senior advisor for the Center on Budget and Policy Priorities, testified that state fiscal problems, which escalated from the worst downturn in more than 60 years, are cyclical and something that states have found a way to address in the past.
"States have a strong track record of repaying their bonds; in most states, bonds are considered to have the first call on revenues," said Lav. "It would be unwise to encourage states to abrogate their responsibilities by enacting bankruptcy statutes. States have adequate tools and means to meet their obligations. The potential for bankruptcy could just increase the political difficulty of using these other tools to balance their budgets, delaying the enactment of appropriate solutions. In addition, it could push up the cost of borrowing for all states, undermining efforts to invest in the future."
However, University of Pennsylvania Law Professor David Skeel said concerns over panic in the bond markets are "greatly overstated." Additionally, he intimated that the same people with those concerns have underestimated the impact of the so-called Great Recession.
"Some have argued that a bankruptcy option is not necessary, because nearly all of the states will be able to muddle their way through their fiscal predicament," he told lawmakers. "This is like saying there's no need for a fire department because most homeowners never have fires in their houses and, if one starts, they can probably stop it in time. This is true, but we still need fire departments for the rare case where a fire burns out of control."
Brian Shappell, NACM staff writer
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Taking a debtor to court is essentially seen as the creditor's nuclear option.
It's what companies do when most or all other efforts to collect have been fruitless; it essentially puts the weight of law behind the creditor's attempts to compel their customer to pay. Since most creditors tend to do a good bit of groundwork upfront, laying the foundation for a positive business relationship built on timely payments and easy collection efforts, many of them might not know too much about litigation, or have only the most general idea of what goes into the process.
Whether the creditor has a lack of experience with litigation or has been through several cases, the reality is that anything that takes place in a courtroom can seem a bit daunting. "Often creditors are either scared by the litigation process or don't really know all that goes into it," said Robert Bernstein, Esq. and Nick Krawec, Esq., managing partner and partner, respectively, at Pittsburgh-based creditors' rights law firm Bernstein Law Firm PC. "Some people think it is just a matter of turning the dogs loose and that's all they have to do. They don't realize that there are possible appearance requirements and costs."
Creditors interested in learning all they need to know about the litigation process, including reasons to sue, or not, what happens during the suit and at trial, and what leverage and negotiation processes take place before the suit, should listen to Bernstein and Krawec during their upcoming NACM teleconference, "Things Your Creditors' Rights Lawyer Should be Telling You Before and during the Litigation Process," set for 3:00pm EST on February 23.
Bernstein and Krawec are both frequent NACM presenters and will deliver tips and information designed to help participants feel empowered by the litigation process. "Some think that once you commit to litigation, it is a 'federal case' and they avoid the chance to create additional collection opportunities in the suit process," they added. "Whether or not to sue depends on lots of things, but the savvy credit professional should understand what litigation does and doesn't mean, so they can make a wise choice. In other words, it shouldn't be scary and it shouldn't be too lightly filed."
To learn more, or to register, click here.
Jacob Barron, NACM staff writer
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In what appears to be an entry into a growing continental market and simultaneously a jab at the United States, China appears to be hotly pursuing building in-roads, or rather tracks, with Columbia.
As a long languishing/unfinished free trade agreement (FTA) between the United States and Colombia continues to draw attention from trade advocates, China has unveiled vague plans to build a rail link through the same nation. It is seen as a direct attempt to compete with the Panama Canal on the world trade stage and would be a slap to the United States by grabbing a larger piece of the South American market. Colombia already conducts more trade with China than any other nation than the United States, and the Asian economic powerhouse already has substantial presence in emerging economic power Brazil, the current pearl of its continent.
The news has given pro-trade advocates and lawmakers, largely Republican, another weapon with which to verbally bash President Barack Obama and his White House that, despite various recent attempts to extend an olive branch, have been vilified by the American business community as anti-trade. During last week's FCIB New York International Round Table, panelist Josh Green, CEO of Panjiva, said he could see the Colombia FTA becoming a casualty of partisan Capitol Hill fighting in the coming months.
"It's become a political system, but it's very likely that, as things progress in Congress, it gets thrown under the bus," Green speculated. "I think it's going to be a tough road. There will be an issue." For what it's worth, Green did question what the impact of such an FTA even would be, noting the Colombian economy is roughly equivalent to that of the state of Missouri.
The Colombian FTA, like the pending one with Panama and a recently forged agreement with South Korea, is leftover from the Bush Administration and, generally, received opposition from Democrats. Pro-trade political rivals have criticized Obama on perceived foot-dragging on such FTA's. Top GOP lawmakers turned up the heat after the party took power in the House and reduced the Democratic majority in the Senate. Just last week, Senate Republican Leader Mitch McConnell (KY) noted that enacting the FTA with Colombia, as well as Panama, would go a long way toward meeting the president's stated goal of doubling exports by 2014.
Analysts believe the Chinese rail idea could help grease the skids, even with those wary of the agreement, for completion and enactment of the Colombia FTA. Stay tuned.
Brian Shappell, NACM staff writer
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The partisan responses to President Barack Obama's recently proposed budget for fiscal year 2012 have thrown competing growth philosophies into sharp relief.
On the one hand, the Democrats concede that spending cuts need to be made, but couple any efforts to simultaneously reduce the deficit while sustaining economic growth with requisite tax increases. Republicans, for their part, argue that the economy, along with job numbers, will only grow if the deficit is decreased by sharply curbing government spending. The competing commentary surrounding the Obama budget reflects these ideologies, giving both sides a chance to trade barbs over which method works best.
As the budget is such a massive document, no one ever seems to approve of it in its entirety, but comments from the president's own party were generally supportive. "Our budget is a reflection of our priorities as a nation, so I was pleased to see that the president's budget makes the tough choices we need to reduce spending and begin to put our nation's fiscal house in order—priorities which voters made clear in November," said House Minority Whip Steny Hoyer (D-MD), who, while taking issue with some funding cuts that would affect his district, noted that the budget made great strides in many areas. "In fact, the President's budget would reduce our deficit by $1.1 trillion over the next decade. At the same time, however, the budget identifies those investments we need to grow our economy, create jobs and strengthen...economic security."
The cuts cited by Hoyer would mostly come from non-defense discretionary spending, which makes up less than one-quarter of the overall budget. Specifically, the cuts would hit funding for programs built to aid the working poor and expand access to graduate education.
Sen. Mary Landrieu (D-LA), chairman of the Committee on Small Business and Entrepreneurship, expressed her fondness for the budget, while urging the president not to go too far in his cuts to the Small Business Administration (SBA). "The president has, again, submitted a budget for the SBA that allows the agency to meet its mission, after years of being underfunded and unable to help small businesses," she said, noting that the president's request for FY2012 amounted to a 1% cut to the SBA. "I agree we need to make cuts where reasonable, and I agree with the president's goal to invest in programs where jobs are being created and where small businesses can reap the most benefit. However, we can't tighten the belt too much or our small business owners will not have access to the resources they need to keep their doors open or rebuild when disaster strikes, or to start and expand when they have a good idea."
The Republican response was predictably negative and even apoplectic in some instances. "This budget is, quite simply, an abdication of adult responsibility. And it is a particular abdication of the responsibility of the President of the United States, who takes an oath to preserve, protect and defend our Constitution," said Sen. Orrin Hatch (R-UT), ranking member on the Finance Committee, citing the portion of the budget that has businesses the most worried—a package of $1.6 trillion in tax hikes over 10 years. "For years we have heard Democrats say that if the rich and businesses paid their fair share in taxes, we could balance the budget and reduce the debt. Well, they sure tested it out in this budget. They soak the so-called rich and American businesses with a fire hose, and yet we are still facing trillions in debt and hundreds of billions in deficits."
Speaker of the House John Boehner (R-OH) flipped the president's State of the Union theme of "winning the future" into "spending the future" in his critique of the new budget. "President Obama's budget will destroy jobs by spending too much, taxing too much and borrowing too much. His budget calls for more failed 'stimulus' spending and job-crushing tax hikes on families and small businesses," he noted. "It borrows more from countries like China and crowds out private investment that creates jobs."
At press time, a competing House Republican budget plan is forthcoming, and GOP leaders have offered only general assurances that it will "lead where the president has failed" and "include real entitlement reforms so that we can have a conversation with the American people about the challenges we face and the need to chart a new path to prosperity."
Stay tuned to NACM's eNews and Credit Real-Time Blog for more credit and business specific budget issues.
Jacob Barron, NACM staff writer
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In its latest release, the Commerce Department tried to deflect attention away from the still-growing trade deficit and China's continued dominance in that area by focusing on near-record exporting activity. Despite recent gains, the trade deficit grew another 5.9% to $40.6 billion. It's the highest tally in more than four months.
U.S. Commerce Secretary Gary Locke said that U.S. exports of goods and services in December increased 1.8% from November to $163 billion. U.S. imports also accelerated, by 2.6% to $203.5 billion. That leaves the overall trade deficit at $40.6 billion.
Lock noted that following a 14.6% decline in 2009, "exports grew 16.6% in 2010, compared with an average annual rise of 11.2% during 2002-2008. Exports of goods and services in 2010 reached $1.83 trillion, the second highest annual total on record and the largest year-to-year percent change in over 20 years." In 2010, exports contributed to nearly half of the gross domestic product growth.
"U.S. exports showed strong growth in 2010, increasing 16.6% over 2009 levels, putting us on track to achieve President Obama's National Export Initiative goal of doubling exports by the end of 2014," he said. "Exports are leading the U.S. economic recovery and helping to create high-quality jobs for the American people."
NACM Economic Advisor Chris Kuehl, PhD noted that news of near-record exporting is good, but talk of reducing the trade deficit is tantamount to silliness:
"As long as the U.S. imports more than 60% of its oil and retains a fondness for inexpensive goods made in China, there will be far more imports than exports...The most worrisome aspect of the trade situation is that much of the export gain can be attributed to the weak dollar, and that is not a situation that will last forever. The Federal Reserve and the White House continue to assert that the U.S. is committed to a strong dollar policy, but there has been little evidence that this has really informed decisions of late. There is always talk that the U.S. can dig itself out of its deficit and debt hole with the right amount of economic growth, and there continue to be those who assert that the improved export sector will be the ticket to some of that expansion."
Kuehl added that the only conditions under which the U.S. could generate a true trade surplus would be most trying (e.g., "a crushing depression").
"If this latest recession is not enough to eliminate the deficit, it is obvious that the U.S. will not want to see the kind of decline that would do the trick," said Kuehl.
Brian Shappell, NACM staff writer
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The Securities and Exchange Commission (SEC) recently charged food processing giant Tyson Foods Inc. with violations of the Foreign Corrupt Practices Act (FCPA).
Allegedly, Tyson's Mexican subsidiary, Tyson de Mexico, made illicit payments to two Mexican government veterinarians who were responsible for certifying the company's chicken products for export sales. Tyson originally concealed the improper payments by putting the veterinarians' wives on their payroll, although they performed no services for the company.
The wives were eventually removed from the payroll, and the $100,311 in payments that Tyson made to the veterinarians were then reflected in invoices submitted for "services." It wasn't until two years after Tyson Foods officials first learned about the subsidiary's illicit payments that its counsel instructed its Mexican subsidiary to cease and desist.
"Tyson and its subsidiary committed core FCPA violations by bribing government officials through no-show jobs and phony invoices, and by having a lax system of internal controls that failed to detect or prevent the misconduct," said Robert Khuzami, director of the SEC's Division of Enforcement.
The company has agreed to pay more than $5 million to settle the SEC's charges and the related criminal proceedings announced by the Department of Justice (DOJ). The total penalty comprises a $1.2 million disgorgement payment, plus pre-judgment interest, along with another $4 million in criminal penalties.
Jacob Barron, NACM staff writer
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