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ANALYSIS: Creditor-Debtor Cooperation Thriving During Pandemic

Sept. 28, 2020, 8:27 PM

More than 40% of defaults coming across creditors’ attorneys’ desks this year are the result of coronavirus-induced hardship, according to Bloomberg Law’s Bankruptcy 2020 survey. But results from the survey also signal hope for distressed clients.

With continued uncertainty around business operations and the resulting economic impact of shutdowns, it is not unreasonable to project that the percentage of pandemic-related defaults will only increase as businesses continue to struggle with reduced revenue and the threat of additional shutdowns.

The Silver Lining

Fortunately, our survey findings indicate that creditors and their attorneys may have taken some lessons of the Great Recession to heart.

Of the commercial debtor attorneys surveyed, more than one-third (39%) reported that most of their clients were able to avoid bankruptcy by crafting out-of-court solutions with their creditors.

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What Could This Mean for Commercial Bankruptcies?

While the rate of commercial bankruptcy filings is increasing each month, it is doing so at a slower pace than anticipated. Continued debtor-creditor cooperation could help keep the rate of commercial bankruptcy filings in check. Many of these workouts are not permanent solutions for businesses’ current distress situations, but even a short forbearance could give businesses the breathing room they need to reposition their business and find other long-term options for avoiding bankruptcy court.

Creditors understand that a crush of bankruptcies, foreclosures, and other adversarial and costly collection litigation can be detrimental to both debtors and creditors. As in most areas of life, working together usually creates a more palatable result for all parties.

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