Commercial Bankruptcies Continue to Soar

Commercial bankruptcy filings spiked in September as the pandemic and its accompanying restrictions continued to keep the pressure on businesses, especially smaller ones, according to industry data.

At the Hahn & Hahn law firm in Pasadena, Dean Rallis, who heads up the firm’s bankruptcy and restructuring group, said he’s seen it himself.

“I would say the increase is probably at least 50 percent over filings last year, and it may be expected to go even higher than that,” said Rallis.

“Based upon my observations, I do see a significant uptick in commercial bankruptcy filings, both Chapter 7 and Chapter 11,” he said.

“I also get reports from a national organization I belong to, which also confirms that on a national basis, the bankruptcy filings for businesses have increased significantly over the last year,” Rallis said.

An analysis released earlier this month by legal services firm Epiq showed a 78 percent spike in commercial Chapter 11 filings in September with 747 documented bankruptcy filings, compared with 420 in September 2019.

Looking at the first three quarters of 2020, commercial Chapter 11 bankruptcies were up 33 percent over last year, nationally, with 5,529 filings recorded, Epiq said in a written statement.

Smaller businesses were taking the biggest hit, according to Epiq Managing Director of Corporate Restructuring Deirdre O’Connor.

“After a slower August, we see an increase in Chapter 11 filings in September, both month over month and year over year,” said O’Connor. 

“These commercial filings are primarily small businesses that do not have access to capital or stimulus,” she said.

“Unfortunately, those bankruptcies will continue to rise in the current economic environment,” O’Connor said. “For the largest companies, opportunistic investors are providing much-needed capital to supplement the lending capabilities of more constrained traditional banks. However, the most over-leveraged distressed companies could succumb to a formal restructuring due to lack of credit support and overall sector decline.”

Non-commercial bankruptcies, however, have seen a steady decline through the COVID-19 pandemic, said Epiq AACER Senior Vice President Chris Kruse.

“Regulatory programs have effectively kicked the can down the street by injecting liquidity into the market, delaying new bankruptcy filings,” said Kruse.

But not all businesses that shut down file for bankruptcy, so the figures do not represent the total number of shuttered businesses, said Hahn & Hahn Managing Partner Chris Kerns.

“Bankruptcy is a very expensive process and sometimes there aren’t enough assets to even be able to do it if you need to do it. So there are other ways to do it. For instance, an assignment for the benefit of creditors can be done. Or just working out your debts with your creditors,” Kerns said.

“Clients are loath to file bankruptcy. They really want to hold on. I’ve had definitely a few times where their financial advisers and legal advisers are saying you need to file bankruptcy. And they’re saying, ‘No, we want to pull this off. We want to cover our debts,” said Kerns. “Sometimes there’s no other alternative.”

Kerns said she feared the situation would worsen before it improved.

“I think the longer this goes, the more companies are more precarious and just aren’t going to make it,” she said. “You need a crystal ball to see exactly where that goes, but it’s not looking good.”

Rallis shared a similar outlook, adding that another surge in the COVID-19 pandemic still poses the threat of inflicting further economic damage.

“I do expect that there’s going to be an uptick in bankruptcy filings in the near term, and it’s probably going to last for at least a couple of years. It’s going to take a while to recover,” he said.