As Business Bankruptcies Rise, Is California in Crisis?

Small businesses are critical to the strength of the economy, so when the latest stats from Equifax reveal that business bankruptcy filings have risen both nationally (44 percent) and statewide (81 percent in California, where the situation is particularly dramatic), people across the state are starting to wonder: Does this qualify as a crisis?

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Small businesses are critical to the strength of the economy, so when the latest stats from Equifax reveal that business bankruptcy filings have risen both nationally (44 percent) and statewide (81 percent in California, where the situation is particularly dramatic), people across the state are starting to wonder: Does this qualify as a crisis?

The answer is yes ... and no -- depending on who you talk to.
Timothy McFarlin, a partner with McFarlin & Geurts LLP in Irvine, California, which represents consumers and businesses in bankruptcy transactions, says not to panic -- that we've encountered this kind of cycle before. "Although the number of bankruptcies is up from 2008 or 2009, it was also very high in 2005 before the bankruptcy laws changed," he says. "It is a normal economic cycle. This will pass."

But according to Edward Neiger, founder and partner with Neiger LLP, a corporate and personal bankruptcy firm in New York City, "This definitely qualifies the situation as a crisis." Neiger points to the dangers of the snowball effect: "When businesses file for bankruptcy, it causes many other businesses to file. Everything is interconnected, and different sectors can rise and fall together."

Who's most at risk? McFarlin has seen many bankruptcy filings of businesses that work in the housing or mortgage industries, such as developers, builders, mortgage companies and "owners of commercial real estate who have been unable to find replacement financing for loans coming due." But small businesses of all stripes -- franchises, dry cleaners, restaurants, boutique agencies, just to name a few -- are all trying to weather a severe drop in revenue brought on by the recession. Meanwhile, unemployment figures in California remain stuck in the double digits, and fewer consumers have extra money to burn. Even health providers are at risk. What happens to the small dental office when client after client loses health insurance?

On the plus side, if there is one, those businesses that are growing strong, making a profit, and even looking to open additional locations currently have access to an impressive pool of qualified candidates seeking work. Some have been out of work so long they're even willing to relocate for a job, any job. If you're hiring, that's excellent news.

But even that shred of positivity can't disguise California's dire economic situation. Outside of mounting debt and business bankruptcies, personal bankruptcies and foreclosures continue to experience high rates, and there's still that ever-present difficulty in obtaining financing and credit. The Obama administration's loan modification program, unfortunately, has yet to provide any real relief.

So as we near the end of the first month of a brand-new year, the cautious optimism hoped for by so many may ultimately give way to gritty realism. "Especially in states with exceptionally high rates of bankruptcy, you will see more bankruptcies and more unemployment, not less," says Neiger.

How long will we have to wait? No one knows for sure, but California will likely continue to face harsh difficulties in 2010 and beyond. "I'd expect 2010 through 2012 to be very busy for bankruptcy filings," says McFarlin. "I would expect it to taper off after that." We can only hope.
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