Waiting for the Bankruptcy Tsunami

There will be a coronavirus bankruptcy wave; the only question is when.  Without a working crystal ball, no one can answer that.  But, we can guess at what conditions may precipitate the wave.

Large businesses are filing bankruptcies at an alarming rate. Who would have predicted that Borden Dairy, Neiman Marcus, JC Penney, Hertz, or Whiting Petroleum would file even two years ago?  Small businesses have closed permanently as a direct result of the pandemic.  

The federal government will play a role in the wave of business bankruptcies.  It is still unclear whether Congress will extend another round of PPP loans to help businesses keep afloat.   Once these loans dry up and businesses are forced to lay off employees and/or close, the bankruptcy filings will start in earnest.  Some will try to restructure under chapter 11; small businesses can now take advantage of chapter 11’s Subchapter V, which recently came into effect and is tailored to accommodate small businesses.  Other small businesses will just dissolve and the individual business owners who guaranteed business loans will likely file under chapter 7.

The business bankruptcies will spawn individual bankruptcies.  Once the government payments to individuals dry up and unemployment benefits expire, individuals will start to file if they find themselves unemployed or employed at a lesser rate and unable to meet expenses.  These most likely will be chapter 7 filings, as they will not have the income to sustain a chapter 13 plan and payments.  Others will come out employed and able to propose a chapter 13 plan to cure arrears and keep their homes and vehicles.

Bankruptcy filings will be impacted by the financial industry as well.  Many lenders have been willing to forbear on loan payments, delay repossessions, or rewrite loans to accommodate changed financial circumstances due to the pandemic.  Once business returns to normal, and payments come due that can’t be met, this will have an impact on filings.  

Landlords will have a hand in increasing bankruptcies.  If they are currently working with tenants and reducing rent by agreement, both to businesses and individual households, they will stop at some point, and the businesses and individuals affected could be driven to bankruptcy with debt from unpaid rent contributing to a difficult financial situation.

While all of this is predictable and unfortunate, and indeed coming, the many factors involved make predicting when the wave will happen a difficult task.  But, it will happen. 

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.