Credit Card Company Advanta's Bankruptcy Not Good for Small Business

For many Americans, the news of a credit card company declaring bankruptcy would be welcome news. However, before any corks are popped, those celebrating should look a little deeper into what Advanta Corp.'s Chapter 11 filing means for the economy.

Advanta Corp. provides credit cards to small businesses, which they can use to buy general business items and support operations. Because the recession has had such a tremendous impact on our nation's small business owners, few Advanta customers could repay their debt, leaving the company in dire straits. The bankruptcy is not a complete surprise to banking analysts or Wall Street, as the company ceased all activity on current accounts a number of months ago.

In its petition, filed in Delaware, the company cited total assets of about $363 million with debt totaling $331 million. The company's CEO said the the just more than $30 million schism required filing protection, adding, "The economic debacle over the last two years devastated Advanta's small business customers and Advanta itself."

The bankruptcy does not change the obligations of current customers, which will continue to be paid as if under normal circumstances. According to reports, 360,000 Advanta customers owe close to $2.7 billion.

When anything that is tied to small business fails, it's not a good thing for our country's economic equilibrium. While it's easy to point and laugh at the failure of a credit card company, critics should practice some restraint when considering the needs of our mom and pop hardware stores, local diners, locksmiths and corner coffee shops. The smaller stores and service providers we depend on every day require credit to operate. Now, another source of capital has dried up in an already overdrawn credit aquifer.

There is some backstory to the Advanta tale, however. This past summer, the company had to agree with the Federal Deposit Insurance Company (FDIC) to refund customers close to $35 million because of "unsafe or unsound" practices. The refund was part of a settlement stemming from charges it violated federal trade laws in regard to pricing on business credit cards and in its marketing of cash-back incentives.

Sound familiar?

The company did not officially acknowledge the acceptance of the charges but nevertheless agreed to settle to avoid legal action.

A month later, Advanta released 200 employees, taking the year to date layoff total to 1,100. Shortly after, it was delisted from the NASDAQ stock exchange because its stock was below $1.00 per share for more than 30 days.

The company tried several times to work out non-bankruptcy re-organizations with the FDIC. After a second plan was denied, Chapter 11 was the last, best option.