Businesses and individuals considering bankruptcy during the pandemic might be holding off for now while the crisis unfolds, but experts expect bankruptcies to rise as companies continue to struggle.
“Many industries are under extreme stress, especially those dealing with hospitality, retail, various types of service businesses, manufacturing, commercial real estate, and transportation,” said Brian W. Bisignani, principal with Post & Schell, P.C., based in Lancaster County. “It is not just big companies or small companies, and it is not simply one geographic region, but a broad cross section of companies and throughout the country.”
For now, though, statistics from the U.S. District Court, Middle District of Pennsylvania, show that bankruptcy filings for the second quarter of this year are lower than the same quarter a year ago. For the three-month period ending on June 30, which was during the height of the pandemic, 817 new bankruptcies were filed. The three main bankruptcy chapters are Chapter 7, which is a liquidation, Chapter 11, which allows for a restructuring, and Chapter 13, which gives individuals the opportunity to create a repayment plan with creditors.
The 817 filings for the Middle District, which spans from southcentral Pennsylvania through the Lehigh Valley, included 625 Chapter 7 filings and 192 for Chapter 13, with no filings under Chapter 11.
In comparison, for the same period in 2019, there were 1,526 filings. Those included 953 filings for Chapter 7, 11 for Chapter 11, and 559 for Chapter 13, with three listed as “other,” according to court records.
Sara A. Austin, with the Austin Law Firm based in York, said that businesses are now just starting to think about filing, and a lot of those cases will be in the retail sector.
“This area will start to pick up as the lockdowns continue and people shop less and buy less,” Austin said.
“As for personal filings, that has not even begun yet,” she added. “For many, they need to figure out how to pay for the roof over their head and food on their table. They are not worried about paying the credit card, medical, personal loan or other unsecured debts they might have, and those are the ones that a bankruptcy will discharge.”
Austin pointed out that entities holding the debt are not filing lawsuits because they know there is no way to collect, which is another reason why there are so few personal filings so far.
“At some point, especially when foreclosures begin again, this tide may turn and people may file to bring mortgages current and to keep houses,” Austin says.
Observers also suggest that the lower numbers in the second quarter compared to 2019 simply reflect a doldrum that will not last after stimulus money works its way through the economy and businesses and individuals use up savings.
“During the initial part of the crisis, these companies relied on cash and other reserves, including credit lines from their lenders,” said Bisignani, whose practice exclusively works in the areas of corporate and business bankruptcy cases and financial restructuring. “In fact, a number of companies simply drew down their credit lines and parked the cash.”
At this point, at least In some instances, reserves are low or exhausted.
“I would suggest that you will see increased corporate filings throughout the remainder of 2020 and certainly into 2021,” he said, noting the severe contraction in the national gross domestic product since the pandemic started. “ … You are seeing the beginning of a wave of corporate and business bankruptcy cases. That trend is going to continue, and in fact, increase.”
Statistics for July and August were not yet available, but other experts expect spikes, as well.
Douglas J. Smillie, chair of the litigation department with Fitzpatrick, Lentz and Bubba in Allentown, said many creditors are in “forbearance mode, whether forced or voluntary.”
“For example, many banks are granting payment moratoriums,” Smillie said. “In other cases, the state has placed a hold on evictions and foreclosures. This means that some of the pressures related to finances, such as foreclosure, eviction and collection lawsuits, have been on hold.”
For a lot of businesses, the mandatory shutdowns have pushed them to the brink, forcing them to consider bankruptcy, he added.
“An interesting issue, particularly related to COVID-19 and the CARES Act, concerns the availability of PPP (Paycheck Protection Program) loans to business debtors,” Smillie said.
The federal Small Business Administration determined that such funds would not be available for companies in bankruptcy, which has led to litigation to compel the SBA to make the loans.
“The courts have split on the issues, and there have been some creative solutions, including the quick dismissal of a bankruptcy case in order to allow the company to obtain PPP funds, followed by the prompt re-filing of a bankruptcy,” Smillie said.
Bisignani works with creditors, so his advice to business clients is to be careful and to try to work with companies that were healthy before the pandemic but couldn’t avoid the severe distress caused by the crisis. Exerting too much pressure might force the companies into bankruptcy.
“Some of these companies are presently adapting and will successfully adapt to the new situation, while others will not and will have no alternative but to file for bankruptcy protection,” he said. “We are already seeing that happen.”
He also looks at how well a company is run.
“Those that are well capitalized and well managed by competent professionals will withstand the crisis much more readily than those which are not,” Bisignani said.
He and the others don’t expect a return to normal anytime soon, with Bisignani saying that the future will be different for various businesses.
“Certain industries will take literally years to return to normal,” he said, noting that the airline industry is one example. “Other industries will recover more quickly. … The real question is when will the pandemic come under better or more effective control — and that is currently unknown. When that happens, things will start to return to normal.”
One of the biggest changes will be in the commercial real estate market, where a lot of lease holders are not paying rent or asking for a partial deferral. Meanwhile, a lot of companies are rethinking whether they need as much space because people continue to work from home.
“All of that is going to impact the value of certain types of commercial real estate,” Bisignani said. “It also means that the office environment as we knew in 2019 and before may never return to what was once normal.”
Smillie suggested that some businesses still don’t have enough information.
“For many clients, creditors and debtors, we are still in a wait-and-see mode,” he said. “I believe that many businesses that closed may be able to re-open once it is safe to do so. Both creditors and debtors are in the same situation: a shuttered business may not be able to pay rent, but in the current situation, a landlord is unlikely to find a viable replacement tenant. The old adage ‘you can’t get blood from a stone’ holds true.”
He expects that there will be a number of disputes resolved short of court, unless there are too many debts coming from too many directions, such as vendors, utilities, landlords and lenders.
“Then bankruptcy may be the only option,” Smillie said. “Whether that bankruptcy takes the form of a reorganization or a liquidation will vary from company to company, business to business. “
Because the federal court system moved to electronic filings years ago, access to the courts has been relatively open, so COVID-19 has not hampered that aspect of bankruptcies. In fact, a note on the website of the Middle District points out that it is proposing a rule change to enhance electronic filings by further promoting electronic signatures, and the rule change could take effect in September.
“My practice before the bankruptcy courts has been impacted, but not horribly,” Bisignani said .
Federal court filings have been done electronically for a number of years, and court hearings have continued through telephonic court appearances, he pointed out. Problems could arise as the number of COVID-19 cases increase and governments impose new restrictions.
“In March, there was considerable disruption as many firms switched to remote work environments for their personnel,” he said. “However, overall, it has not been as disruptive as one would think given that many firms have invested heavily in technology over the past 10 years or so that makes remote working relatively easy. This would not have been the case 20 years ago when the state of technology was considerably less advanced.”
Overall, he isn’t optimistic about the year ahead.
“The wreckage that has been created since February 2020 is extreme and unprecedented,” Bisignani said. “I have been a commercial bankruptcy practitioner for over 30 years, and I have never seen anything quite like this. It is across industries. It is not just nationwide, it is worldwide. Supply chains are disrupted. You have massive numbers of unemployed workers or underemployed workers.”
The cascading effect of people not working or working less, so therefore not spending, will continue to ripple through the economy, placing even more stress and layoffs at businesses that are interconnected, he added.
“The economy will come back into equilibrium, but it will take some time and, unfortunately, many people and many businesses will be hurt in the process,” he said.
But for well capitalized businesses, there are opportunities, he also said.
“And many more opportunities will arise over the next few years as the financial crisis winnows out the weak companies, those companies without adequate financial reserves, and those companies that cannot adapt,” Bisignani said. “Bankruptcy is designed, in part, to allow for the re-use of assets through bankruptcy sales and other transactions and certain companies will be able to take advantage of that and emerge stronger when this crisis passes.”