ANALYSIS: Bankruptcy filings are tiptoeing up. And after?

As I work from home today, the mood is eerily similar to what I witnessed in 2008 as I prepared for my first legal job in the private sector. The words “recession” and “crash” and “debt” were all over the news then, as they are today. In my world of bankruptcy, banks were strengthening their special asset groups and law firms were filling their bankruptcy ranks, as they are today.

According to Bloomberg Monitoring the recession, the likelihood of a recession in the next year has risen to 53% this month, from 28% just a month ago. Meanwhile, other analysts predict that a global recession is already upon us. With the new coronavirus causing unpredictable turmoil in markets and forcing consumers to stay in their homes, potentially losing wages and slowing spending, it seems more likely that the long-awaited recession is now upon us.

If we are really on the verge of a recession, what could this mean for bankruptcies?

For the first time in a decade, bankruptcy filings are on the rise. And there are several factors that could cause an even bigger increase.

Chapter 11 Accessibility

The Administrative Office of the United States Courts (AO) reported an overall annual increase in bankruptcy filings of 0.2% for 2019 compared to 2018. Last year, business bankruptcies saw an increase of 2.5% compared to 2018, which could increase due to recent changes to Chapter 11 of the Bankruptcy Code.

On February 19, 2020, Small Business Reorganization Act became effective. The new subchapter V of Chapter 11 is specifically designed to make bankruptcy protection more accessible to struggling small businesses by eliminating quarterly fees and shortening and streamlining the process. With the changes, small business debtors can choose a process that more closely resembles the more expedited Chapter 13 process, with a trustee, shorter deadlines, a condensed form plan, and the exclusive right to propose a plan.

It’s too early to see what effect the Small Business Reorganization Act will have on Chapter 11 filings, but its intention is to lower barriers for small businesses seeking legal redress.

Chapter 12s Increase

According to statistics published by the OA, Chapter 12 bankruptcy filings, designed specifically for family farmers and fishermen, from January to December 2019 increased by 19.48% from the previous year. This is the largest annual increase in at least five years.

With the Family Farmer Relief Act increasing family farmer debt limits from $ 4.3 million to $ 10 million as of August 23, 2019, more farmers will have access to the specialized procedures and protections offered by Chapter 12.

According to Bloomberg Law Records, Chapter 12 filings for the fourth quarter of 2019 (measured October 1 to December 31) increased to 140 from 130 in the same quarter of 2018. So far in 2020, debtors have filed 141 Chapter claims. 12, far ahead of the 100 applications filed during the same period in 2019.

Consumer eligibility

Consumer bankruptcies could see further increases as well. Based on bankruptcy eligibility timelines, millions of debtors who filed during and shortly after the Great Recession are, presumably, eligible to re-file.

Chapter 7 debtors receiving discharges as recently as 2012 may now become eligible for Chapter 7 relief upon the expiration of the eight-year legally required period between the Chapter 7 discharge and the new filing. Debtors receiving a Chapter 13 discharge in cases filed as recently as 2014 may also become eligible to file Chapter 7 at some point this year.

If we read the tea leaves correctly and the country is truly on the verge of a recession, the pump seems to be on for an increase in case filings. It’s too early to tell if deposits will reach Great Recession levels, but that would require current numbers to more than double. The actual amount of the increase will depend heavily on whether the impending economic contraction is as drastic as that of the last recession and whether our country has the capacity to cope with and quickly stop the spread of the new coronavirus.

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