Nov. 9 (Bloomberg) -- Advanta Corp., the small-business credit-card issuer that cut off almost 1 million accounts as defaults soared, filed for bankruptcy and said its undercapitalized banking unit may be turned over to regulators.

The lender sought court protection from creditors because Advanta won’t be able to meet its obligations even with almost $100 million in cash and equivalents on hand, the Spring House, Pennsylvania-based company said yesterday in a statement. While the firm’s bank isn’t covered by the filing, the unit may be put into a receivership run by the Federal Deposit Insurance Corp., the statement said.

“The economic debacle over the last two years devastated Advanta’s small-business customers and Advanta itself,” Chief Executive Officer Dennis Alter said in the statement. He’s waiving his salary and bonus, the statement said.

Advanta, the 15th-biggest card issuer by purchase volume last year, is the industry’s biggest to fail since the recession began. The company said in August it would dismiss about half the staff, leaving fewer than 200, after write-offs more than doubled in June to 56.95 percent. That was five times the industry average as measured by Fitch Ratings for that month, when write-offs at all card companies climbed to 10.79 percent.

Mounting Losses

Credit-card losses typically track the U.S. unemployment rate, which climbed to 10.2 percent in October, the highest since 1983. Moody’s Investors Service previously forecast write- offs to peak at 12 to 13 percent in mid-2010. Bank of America Corp., the second-biggest credit-card issuer, said defaults were 14.25 percent in September, the most among the top six U.S. card lenders.

Advanta listed assets of $363 million and debts of $331 million in Chapter 11 documents filed in U.S. Bankruptcy Court in Wilmington, Delaware. Weil, Gotshal & Manges LLP and Richards, Layton & Finger PA are providing legal counsel, according to a Web site provided by Advanta.

In a separate filing today, Advanta posted a fifth straight quarterly loss, with the third-quarter deficit equal to $76.5 million, or $1.89 a share.

The firm said in August its survival depended on developing a new business plan, a task complicated by an order from regulators that the Advanta Bank Corp. unit must stop taking deposits. The parent company’s bankruptcy announcement said the FDIC rejected two plans to stave off collapse.

Capital Deficit

The banking unit’s capital is below regulatory minimums, the statement said. Advanta “consciously decided not to fund the capital deficiency in order to preserve value for the senior retail noteholders and other Advanta Corp. stakeholders,” the company said.

Advanta has about $138 million of senior retail investment notes outstanding, the statement said. The company listed $2.08 billion in deposits as of Sept 30. Regulators have shut 120 banks this year, with failures running at the fastest pace since 1992.

The bankruptcy filing may help preserve assets to pay the debt holders, who likely will be compensated before common shareholders, spokesman Tom Becker said. The actual outcome “would be determined under a plan of reorganization,” Becker said.

The 59-year-old firm’s Class B shares, which sold for $34.07 in June 2007, dropped to 31 cents at last week’s close of the Nasdaq Stock Market and plunged to 9 cents today in early trading.

Advanta said it’s still collecting on a $2.7 billion portfolio of managed receivables from 360,000 customers, and card holders are expected to pay their bills. The bankruptcy filing said new card charges were halted May 30. Analysts had predicted the cutoff would prompt some customers to stop paying, boosting Advanta’s defaults.

The case is In re Advanta Corp., 09-13931, U.S. Bankruptcy Court, District of Delaware (Wilmington).

To contact the reporter on this story: Peter Eichenbaum in New York at peichenbaum@bloomberg.net

Last Updated: November 9, 2009 17:59 EST