Business bankruptcy filings reached a 30-year high in Connecticut in 2009, another sign of the economic downturn’s deep impact on the state.
There were 467 Connecticut companies that filed for bankruptcy last year, up nearly 20 percent from 2008 when 392 businesses filed, according to data from the American Bankruptcy Institute. It was the largest number of companies that filed for bankruptcy in Connecticut since 1982.
Nationally, there was a 43 percent uptick in business bankruptcy filings totaling 60,837.
“I’m not surprised at all that there was such an uptick in bankruptcy filings,” said Hartford bankruptcy attorney Barry Feigenbaum. “The economy has forced a lot of businesses to shut their doors.”
Companies typically file for bankruptcy under Chapter 11 of the federal code to protect themselves from creditors as they attempt to reorganize or under Chapter 7 as they prepare to liquidate.
Anthony Parent, founding partner of IRS Medic, a Wallingford law firm that works with businesses facing tax troubles, said cash flow problems are among the biggest reasons companies are filing for bankruptcy.
Both Parent and Feigenbaum said they are not convinced that 2010 will be any better for Connecticut businesses.
“There were many companies last year that were considering bankruptcy but they didn’t pull the trigger,” Parent said. “But there is nobody that is convinced that the economy is going to improve that much this year.”
As a result of the economic downturn, which has cost the state 100,000 jobs so far, many businesses are seeing less demand for their products, or their customers are not paying their bills on time, creating to a liquidity crunch, Parent said. Businesses also have encountered an inventory backload, which hurts the value of those goods over time.
Parent said he’s also seen many employers who are reluctant to let go of employees when they need too. “Out of loyalty, they don’t want to layoff their workers so they carry a higher payroll than they can afford,” he said.
Credit availability has also been a big problem.
“A few years ago, people didn’t have problems refinancing their way out of trouble,” said Feigenbaum, who is a lawyer with Rogin Nassau. “Now it’s nearly impossible because hard money lenders are reluctant to lend, especially to businesses that are having some financial problems. Banks are less willing to take risk and less willing to work with companies in trouble.”
One such example, Feigenbaum said, was Connecticut-based Golfers’ Warehouse which filed for Chapter 11 bankruptcy in July, and eventually was sold to a California-based golf accessories retailer.
Feigenbaum, who represented Golfers’ Warehouse, said the recession and slowdown in retail sales hit Golfers’ Warehouse hard, but the company also had difficulty financing its inventory.
Wachovia, Golfers’ Warehouse’s primary lender, was unwilling to maintain traditional advance rates on its loans, which decreased the amount of credit available to Golfers’ Warehouse to purchase goods, Feigenbaum said.
The company eventually sold its half-dozen stores in Connecticut, Rhode Island and Massachusetts to Worldwide Golf, a California-based retailer. The company ended up closing one of the stores in Massachusetts, but its Connecticut location remains open.
Companies that deal directly or indirectly with the construction or real estate industry have been especially hit hard, Parent said.
Parent said he represents many clients in construction trades who have seen their contracts for projects dry up as cities, towns and businesses spend less on capital improvement.
“The downturn in the construction industry alone has a huge domino effect,” Parent said
Construction lost 800 jobs in January, and 17,100 jobs, or 25 percent of its workforce, since June 2007. At the same time, membership in the Home Builders Association of Connecticut has shrunk from 1,500 to 1,100.
The retail sector has also taken its lumps, and many of those companies have used bankruptcy proceedings to close under-performing stores, Feigenbaum said.