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15 September 2020 / Scott D. Fink

Crystal Ball: Predicting Future Bankruptcy Filing Trends

Topics: Bankruptcy



The past several months have seen our industry grapple with a worldwide pandemic, which has caused unprecedented levels of unemployment and economic uncertainty in the United States.  Throughout the pandemic, two bankruptcy filing trends have developed:  
 
  1. A decrease in overall consumer bankruptcy filings and
  2. A significant spike in commercial chapter 11 filings
The prevailing question now appears to be: what does the future hold for bankruptcy filings?
 
To predict what’s coming, it is first necessary to try and understand the reasons why consumer filings may be lagging this year.  First, the pandemic forced many consumers to “lockdown” and avoid unnecessary travel, including visits to bankruptcy counsel.  Second, the forced “lockdown” also had the unintended effect of decreasing consumer spending on all but essential items.  This, coupled with government intervention in the form of stimulus checks, enhanced federal unemployment benefits, and an extension of due dates for payment of local, state, and federal taxes allowed many consumers to continue making scheduled payments on their debts and, in some cases, even build a war chest of savings.  
 
Third, many lenders have offered assistance to borrowers on the edge of default, including payment deferment and forbearance.  Finally, either through government-ordered foreclosure and eviction moratoriums or through lenders’ unilateral decisions to halt collection efforts, many of the usual triggers for consumers to seek bankruptcy relief have simply been absent over the past several months.
 
It is expected that foreclosure and eviction moratoriums will eventually be lifted and that lenders will eventually remove existing holds on collection activities.  Further, many lender-offered payment deferrals and forbearance arrangements are set to expire in the coming months.  In addition, many small and mid-sized businesses utilized the Paycheck Protection Program (PPP) to fund payroll and to make rent and utility payments during the early months of the pandemic.  Many businesses are on the tail end of the use of those funds.  
 
Accordingly, it would appear we are approaching a period of increased bankruptcy filings for consumers.  The timing of this “spike” in consumer filings will, of course, be highly dependent upon:
 
  • Any changes in the overall status of the pandemic
  • Any further government stimulus and/or assistance to consumers
  • The lifting of foreclosure and eviction moratoriums (many of which were recently extended through the end of 2020), as well as 
  • Collection holds
The best estimate at this time puts any appreciable spike in consumer filings out to the first quarter of 2021.

On the commercial front, several high profile chapter 11 commercial bankruptcy filings have received attention, including those of FoodFirst Global Holdings (parent company of the Brio and Bravo restaurant chains), Neiman Marcus, J. Crew, Gold’s Gym, JC Penney, Pier 1, Hertz, GNC, Sur La Table, and Brooks Brothers - just to name a few.  

Looking ahead, the following statistics paint a bleak picture in the coming months for some large industries and the employees who rely upon them:
  • For the US airline industry, which normally employs approximately 500,000 FTE equivalents, the total number of air travelers is down a staggering 70% through August 20, 2020.
  • For the hotel industry, which represents more than 8 million jobs either directly or indirectly, US hotel occupancy rates fell below 43% for the month of June 2020 compared with rates normally over 70% for the same month historically.  The revenue per available hotel room, which was $86.76 in 2019 fell below $39.00 in June.
  • For the amusement industry, Cedar Fair, which operates 13 amusement parks across the country including Cedar Point and Kings Island, reported a 98% drop in their second-quarter earnings and have acknowledged that summer attendance has not met expectations.  
  • For US movie theater chains, the news is even worse, with revenue for AMC Theaters down almost 100% in the second quarter and with the vast majority of US theaters shuttered since the COVID-19 pandemic took hold.  Theater operators normally employ over 167,000 individuals in the United States.  
  • Small businesses across the nation, including restaurants and retail storefronts, face uncertain futures as they struggle to maintain profitability while implementing safety precautions, including limited capacity, increased sanitization procedures, and enforcement of social distancing measures.
Taken together, this bleak picture would appear to portend more economic pain on the commercial front, with significant failure of businesses, both large and small.  This will necessarily lead to an increase in both commercial and consumer bankruptcy filings, as more and more employees are left without a source of income and health insurance, while business owners are forced to address personal guaranties of corporate debt.

The great unknown factor, of course, will be the potential intervention of the Federal government with additional economic stimulus and assistance for businesses, both large and small.   If Congress is unable or unwilling to pass additional stimulus measures, the expectation must be that business failures will increase exponentially for the remainder of this year and into the first quarter of 2021.  With those business failures will come a sharp increase in both commercial bankruptcy filings and consumer filings, as these business failures will set off chain reactions for everyone down the line, from vendors and suppliers down to employees and their dependents.

In summary, expect the remainder of 2020 and the first half of 2021 to be a turbulent time for bankruptcy filings.

This blog is not a solicitation for business and it is not intended to constitute legal advice on specific matters, create an attorney-client relationship or be legally binding in any way.

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