Bankruptcies doubled in 2009

It may not be surprising that the number of companies filing for bankruptcy more than doubled in the Czech Republic last year, owing to a combination of economic recession and simplified bankruptcy laws. But a breakdown of all bankruptcies shows the number of personal bankruptcies more than tripled last year and shows no signs of easing in 2010, a potential trend of bankruptcy as a means of debt relief.

The total number of declared bankruptcies rose 128 percent to 3,980 in 2009, according to the Czech Credit Bureau. Included in this number are personal bankruptcies, which more than tripled to nearly 2,500, and there are still thousands of personal bankruptcy applications awaiting completion, which analysts say should drive the figures up even further in 2010.

The recession had more far-reaching effects on thousands of companies throughout the country, including Davay, one of the largest CD and DVD distributors in the Czech Republic. The company, located in Brno, was denied a chance at reorganization and forced by creditors seeking 25 million Kč in debts to go into bankruptcy Jan. 6.

"Creditors decided to give up and force us into bankruptcy, so the profitability of their claims will be much lower," the company's deputy Michael Buchlovský told the daily Hospodářské noviny Jan. 7.

Buchlovský's comment points to the most significant difference between personal bankruptcies and those filed by companies. Individuals who go bankrupt are expected to a pay a maximum of 30 percent of their debt within five years, making bankruptcy a much more attractive path for individuals than businesses, said Radek Laštovička, managing director of Coface Czech.

"Given the current reality, there are no benefits for companies to enter insolvency. Just the contrary: Surviving financial difficulties is always preferred to the Czech insolvency procedure," he said. "On the other hand, an individual's livelihood is not in danger when they enter the insolvency procedure. They just cannot own any substantial assets for five years, and then they are free to do whatever they want again."

Věra Kameníčková, head of Analytical Center of Czech Credit Bureau, said the trade, construction and service sectors - which were most significantly affected by the financial crisis - saw the most bankruptcies in 2009, while the transport and banking industries saw the largest year-on-year increase. The cause of the increase in bankruptcies is a combination of domestic and international factors, she said.

"Above all, the primary reasons for the bankruptcy growth within the corporate sector are the slow world economic growth, which is especially important for the small and open Czech economy; the reluctance of banks to provide credit and growing unemployment together with the slow rise in wages limiting domestic demand," Kameníčková added.

The Insolvency Act, which went into effect in January 2008, is another factor in the increase of corporate bankruptcies, said Kameníčková. The act allows companies to file for insolvency online, either by declaring bankruptcy or petitioning for a three-month moratorium during which the company can consolidate operations and negotiate with creditors.

 By reducing the red tape that previously came with insolvency proceedings, the act has streamlined the process and provides more options for troubled companies, but, more significantly, it "has given more privilege to creditors rather than sped up the bankruptcy process," allowing nervous creditors to force companies like Davay into bankruptcy, she said.

According to Cyril Mores, a broker at Creditreform, the Insolvency Act has had a more significant effect on the dramatic rise in personal bankruptcies, which did not exist in the country before the act was passed.

"Because ... personal bankruptcies in the Czech Republic are a completely new possibility of debt relief since the act, the increase in personal bankruptcies was expected, and we expect the number of applications for personal bankruptcy will certainly continue to grow," Mores said. "But, compared with countries where personal bankruptcy has been in practice for a long time, the total number in the Czech Republic is still relatively low."

Mores said the main reasons for personal bankruptcy include increasing household debt, job loss and the inability to repay consumer credit and mortgage debt. With the government expecting unemployment to exceed 9 percent in 2010, the stage is set for an even more drastic increase in personal bankruptcies. As more companies declare bankruptcy, causing unemployment to rise, personal bankruptcy should continue apace. Analysts believe corporate bankruptcy could level off in the first quarter of 2010, but the corresponding effect on personal bankruptcies won't be immediate, according to Laštovička.

"We expect further moderate increases in company insolvencies in the first half of 2010 with a decrease by the end of the year. Contrary to that, personal bankruptcies might develop much more dramatically, and they are unlikely to start decreasing before 2011," he said. "The reason behind this expectation is the fact that unemployment development always lags many months behind economic development."

Stephan Delbos can be reached at
sdelbos@praguepost.com