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Chapter 11 filings decrease, but is that always a good thing?

The American economy remains sluggish -- no one can deny that. Our California readers are likely hearing more from politicians running for office about whether the economic arrow is pointing up or down, but sometimes the best way to figure it out is to look at the objective data. For example, most of the numbers concerning the housing market have turned positive in recent months, and, if one is to believe a lower unemployment rate means what it is supposed to mean, then more Americans are finding work. But there could be a number that means more because it concerns business -- the drivers of employment in America.

According to the most recent reports, the number of business and commercial bankruptcy filings is falling. The first nine months of 2012 showed a 22 percent decrease from the same time in 2011. Chapter 11 bankruptcy filings in particular, however, were down just 11 percent during that period.

The Chapter 11 process can be a bit more complicated than a Chapter 7 "liquidation" bankruptcy, which could account for the lower decrease. That is because a company going through the Chapter 11 bankruptcy process is seeking to remain in operation and ultimately turn the company around to profitability. The process can be complicated because the business has to submit a plan of reorganization, as well as reaching an agreement with creditors. And this is all while the business stays open and tries to turn a profit.

The decrease in the number of business bankruptcies can be viewed as a positive economic indicator, but our California readers need to remember that the Chapter 11 process isn't necessarily a bad thing. The time the company gets to reorganize and shift directions can be exactly what the business needs to return to a more profitable business structure.

Source: Bloomberg, "Business Bankruptcies Fall 22% So Far in 2012, ABI Says," Steven Church, Oct. 3, 2012

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