The Year In Bankruptcy: 2012

December 2012 marked the fifth anniversary of the beginning of the Great Recession, which officially began in December 2007 and ended in June 2009 (at least in the U.S.). Five years down the road, the U.S. economy is undeniably on the road to recovery, with unemployment down to 7.8 percent from a high of 10.2 percent in October 2009, a significant drop in mortgage-foreclosure rates, and a housing market strengthened by the lowest mortgage rates in history. Even so, the recovery is shaky. Much remains to be done to restore the world's largest economy to sustainable growth and a positive outlook. Characteristically divisive U.S. lawmakers in the dysfunctional 112th Congress actually failed to reach a deal in 2012 to avoid hurling the nation over the "fiscal cliff." However, in a (post)-last-minute ploy to prevent automatic spending cuts, the largest tax increase in U.S. history, and a relapse into recession, Congress worked out a compromise on January 1, 2013, that, among other things, repeals most of the Bush-era tax cuts for wealthy Americans, avoids tax increases on middle-class families, temporarily defers deep military and other government spending cuts, restores financial aid to farmers, and extends unemployment benefits.

Among the most memorable business, economic, and financial sound bites of 2012 were "LIBOR scandal," "Taxmaggedon," "QE3," "fiscal cliff," "sequestration," "Flash Crash II," and "the London Whale." Now for the bad news. For the fourth year running, the U.S. ran a deficit in excess of $1 trillion for the fiscal year ("FY") ending September 30. Also, in a reprise of 2011, the U.S. reached its legal borrowing limit on December 31, giving Congress just four months (as extended pursuant to a deal reached in late January) before it must raise the debt ceiling (again), or (again) risk causing the government to default on its bills and financial obligations. In addition, the "sequestration" automatic spending cuts avoided on January 1 were only temporarily deferred. Stay tuned for Fiscal Cliff II. U.S. unemployment remains stubbornly high, compared to the 4.9 percent unemployment rate in December 2007. At the end of 2012, 12.2 million Americans were unemployed (not counting the underemployed and those who have dropped out of the workforce). The U.S. Labor Department reported on January 4, 2013, that American employers added 155,000 jobs in December, leaving the unemployment rate unchanged at 7.8 percent, the level at which it has more or less remained since September. Overall, the country added 1.8 million jobs during 2012. Food prices in the U.S. spiked at the end of 2012 and will continue to be higher in 2013, after the nation's worst drought in 50 years—2012 was the hottest year ever recorded in the contiguous United States—sent prices for corn, soybeans, feed, and related products (e.g., ethanol and meat) soaring. A report released by the U.S. Education Department and the Consumer Financial Protection Bureau in July 2012 estimated that total outstanding student-loan debt in the U.S. for the first time exceeded $1 trillion (with an average loan balance of more than $23,000), surpassing the total U.S. credit-card balance ($693 billion) and the total U.S. auto-loan balance ($730 billion). Moreover, as the number of people taking out U.S. government-backed student loans has exploded, so has the number of those who have fallen at least 12 months behind in making payments—about 5.9 million people nationwide, up about a third in the last five years. In all, nearly one in every six borrowers with a student-loan balance is in default. Student-loan debt collection is a booming business. In FY 2011, the U.S. Department of Education alone paid more than $1.4 billion to collection agencies and other groups to hunt down defaulters. On July 6, 2012, President Obama signed legislation freezing federally subsidized student-loan rates for a year, averting a doubling of interest rates. The change helped more than 7 million students. The latest U.S. Census Bureau data shows that the number of impoverished Americans increased from 49 million in 2010 to 49.7 million in 2011. The report also states that nearly 20 percent of American children continue to live in poverty. In September 2012, the Bureau reported that the income gap between the wealthiest 20 percent of American households and the rest of the country grew sharply, as an overwhelming majority of Americans saw no gains from a weak economic recovery. Median household income after inflation fell to $50,054, a level that was 8 percent lower than in 2007, the year before the recession took hold. Fewer Americans filed for personal bankruptcy in 2012: 1.13 million individuals filed for bankruptcy last year, 14 percent fewer than in 2011, and the fewest since 2008, according to Epiq Systems, Inc. Only 51 U.S. banks failed in 2012, compared to 92 in 2011, 157 in 2010 (more than in any year since the savings and loan crisis of the early 1990s), and 140 in 2009. The number of bank failures was the lowest since 2008, when 25 banks failed. Since 2008, a total of 465 banks with assets aggregating more than $680 billion have been closed by regulators. On the basis of recent trends, however, it appears that the U.S. banking system is slowly stabilizing as banks complete divestitures of toxic mortgage assets. At the close of FY 2012, the number of banks on the Federal Deposit Insurance Corporation's confidential "problem list" fell to 694—about 9.6 percent of all federally insured banks. At its peak in the first quarter of 2011, the number of troubled banks was 888, or 11.7 percent of all federally insured institutions. Headlines in 2012 continued to herald the dire financial straits of U.S. states and municipalities. A variety of factors have combined to create a virtual maelstrom of woes for U.S. municipalities—a reduction in the tax base caused by increased unemployment; plummeting real estate values and a high rate of mortgage foreclosures; questionable investments; underfunded pension plans and retiree benefits; decreased federal aid; and escalating costs (including the higher cost of borrowing due to the meltdown of the bond-mortgage industry and the demise of the market for auction-rate securities). The burden has been too great for some municipalities to bear. Some have turned to chapter 9 bankruptcy protection for relief. California led the charge in 2012, with three of its municipalities filing for bankruptcy, including the largest U.S. city to file for chapter 9 protection (the City of Stockton). In all, 15 municipalities (most of which were water and sanitary districts, hospital authorities, or state-run off-track betting enterprises) filed for bankruptcy protection in 2012, compared to 13 in 2011 and 7 in 2010.

Business Bankruptcy Filings

Business bankruptcy filings dropped off in both FY and calendar year 2012. However, public-company bankruptcy filings remained the same. According to data released by the Administrative Office of the U.S. Courts, business bankruptcy filings in FY 2012 totaled 42,008, down 16 percent from the 49,895 business filings reported in FY 2011. Chapter 11 filings fell to 10,597, down 12 percent from the 11,979 chapter 11 filings reported in FY 2011. According to court data compiled by Epiq Systems, there were 7,760 business chapter 11 filings in calendar year 2012, compared to 8,658 filings in 2011, a decline of approximately 10 percent. All told, commercial bankruptcy filings fell 22 percent in 2012 to 57,788. The drop-off can be attributed to a number of factors, including the continuation of an "amend and extend" (or "extend and pretend") mentality by many lenders loath to redeploy capital in a market with historically low interest rates. The number of bankruptcy filings by "public companies" (defined as companies with publicly traded stock or debt) in 2012 was 86, according to data provided by New Generation Research, Inc., tied for the fewest since 2007. There were also 86 public-company filings in 2011, whereas 106 public companies filed for bankruptcy in 2010, and 211 did so in 2009. The year 2012 added 14 names to the billion-dollar public-company bankruptcy club, compared to 12 in 2011, 19 in 2010, and 52 in 2009. Counting private-company and municipal filings, the billion-dollar club gained 22 members in 2012. The largest bankruptcy filing of 2012Residential Capital, LLC, with $15.7 billion in assetswas the 35th-largest filing of all time, based upon asset value. Nineteen public and private companies with assets greater than $1 billion exited from bankruptcy in 2012. In a change from recent years, more of these companies reorganized than were liquidated or sold. Two of the most prominent names on the list were Lehman Brothers Holdings Inc., the largest bankruptcy filing ever (which returned a 100 percent recovery to brokerage customers), and Washington Mutual Inc., the second-largest bankruptcy of all time. According to Standard & Poor's ("S&P"), the global number of corporate defaults in 2012 exceeded the number of defaults in 2010 and 2011. A total of 82 issuers defaulted in 2012, surpassing the 53 defaults in 2011 and the 81 defaults in 2010. However, the number of defaults in 2012 was significantly lower than the 264 defaults recorded in 2009. Forty-seven of 2012's defaults were based in the U.S., followed by 22 in emerging markets. Nine were based in Europe, while four were based in other developed regions. Missed interest or principal payments and bankruptcy filings were the top reasons for defaults in 2012, followed by distressed exchanges. Completed distressed-debt and bankruptcy restructuring activity totaled $422.6 billion over the course of 2012, according to Thomson Reuters, a 102.6 percent increase compared to the $208.6 billion accrued during 2011. In total, 430 deals totaling $470.8 billion were announced in 2012344 fewer deals compared to the same period in 2011. Activity was led by...