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Editorial & Column
The Calm Before The Storm?
By FRANCISCO JAVIER CIMADEVILLA
August 26, 2004
The number of bankruptcies in Puerto Rico has remained fairly stable, at around 14,000 a year, during the past four years.
Thats good news. At least until you realize the number is twice as high as the 7,000 or so registered in the mid-90s.
Of course, in the 90s, Puerto Rico, along with the rest of the U.S. economy, experienced a long period of sustained economic growththe longest in U.S. history, in fact.
In 99, following the devastation of Hurricane Georges, bankruptcies spiked to an all-time high of 17,911 before leveling off at around 14,000, where they have remained over the past four years.
Why is it that bankruptcies havent spiked upward despite the lingering recession weve experienced since late 2000?
There are several reasons. Tighter credit policies on the part of banks and finance companies is one of them. According to experts, wider and wiser use of available credit counseling on the part of consumers is another.
Above all, we have prevailing low interest rates to thank for the relative stability in the number of bankruptcies over the past few years.
Heres how it has worked. In the past few years, individuals and businesses have taken advantage of low interest rates to refinance their properties, in effect taking equity out and converting it into cash, which they have spent personally, used to consolidate personal debts, or used as working capital in their businesses.
According to experts, that refinancing rush probably had the effect of postponing many bankruptcy petitions. In other words, despite dwindling revenues for businesses or job losses in the case of individuals in the tight economy, many businesses and individuals have been able to get cash through low-interest-rate refinancing to continue paying their financial obligations without having to resort to the breather provided by a bankruptcy process.
But unless the economy picks up soon, we may be seeing more bankruptcies in the next few months. As businesses and individuals exhaust the financial windfall of the refinancing boom, they may find it increasingly difficult to pay off debts or secure new debt, forcing them into bankruptcy.
Breathing a little easier is a lot of what the bankruptcy process is all about, at least in Puerto Rico, where most of the bankruptcy filings historically have been under Chapter 13, the so-called good bankruptcy. That chapter of the bankruptcy laws, like Chapter 11 for business reorganizations, is all about getting your financial house in order so you may continue paying your obligations according to an arrangement with the court that shields the debtor from his or her creditors, unlike the total liquidation process under Chapter 7, the so-called bad bankruptcy.
So, contrary to popular opinion, the bankruptcy process isnt about hanging your creditors out to dry; its about giving you time to get your act together so you can pay them.
In that regard, our front-page story today highlights a worrisome trend. In the past 10 years, the total number of bankruptcies has doubled while the number of Chapter 7 filings, or total liquidation, has tripled. While the percentage of Chapter 13 filings has decreased from 77% to 69% of the total filings, bankruptcies under Chapter 7 have grown from 21% to 30%.
As U.S. Chief Bankruptcy Judge Gerardo Carlo told CARIBBEAN BUSINESS, the trend is of great concern because liquidation bankruptcies tend to strangle the economy the most, as there is no recovery of debts on final settlement.
At the end of the day, theres no substitute for the financial discipline that both businesses and individuals must have. If your revenues are down because of a slow economywhether you are a business experiencing slow sales or a household where one of the jobs has been lostyou must implement cost-cutting measures to ensure you can meet your financial obligations without having to resort to a bankruptcy procedure.
This Caribbean Business article appears courtesy of Casiano Communications.