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ANALYSIS: The Bankruptcies Are Coming! … Eventually

Aug. 3, 2020, 8:22 AM

Since the pandemic began, bankruptcy attorneys and observers have been channeling Paul Revere’s midnight ride and proclaiming that the bankruptcies are coming.

Bloomberg Law’s data analysis shows a more mixed picture. According to the bankruptcy courts’ caseload statistics, overall bankruptcy filings are down compared to 2019, primarily due to fewer consumer bankruptcy filings. Conversely, Bloomberg Law’s dockets show that Chapter 11s are, unsurprisingly, slightly on the rise as the pandemic lingers. Is “Chapter 11s” synonymous with “consumer bankruptcy filings”? You know best, but just wanted to make sure.

In our analysis, we looked at a few key states to determine just how much of an impact the novel coronavirus is having on bankruptcy filings.

And, to gain an even clearer picture, Bloomberg Law has launched its Bankruptcy 2020 Survey which is live and taking responses from bankruptcy attorneys and attorneys preparing to expand into bankruptcy to assess the current state of bankruptcy practice.

Covid/Chapter 11 Correlation in New York, Texas

Prior to the pandemic, bankruptcy filings were increasing and appeared set to continue their slow incline through 2020. Once states began to shut down in response to rising Covid-19 case totals, analysts predicted a “tsunami” of bankruptcies to come. It is still early, but in states such as New York and Texas, which have seen extreme spikes in coronavirus cases, there appears to be a corresponding increase in Chapter 11 bankruptcy filings.

In March, as New York began to monitor and report coronavirus cases, Chapter 11 filings were up 67% from the prior year. April in New York saw a sharp spike in confirmed cases at 228,000 and state-enforced shutdowns and social-distancing measures put in place, alongside a 20% increase in filings from the previous month and more than double the Chapter 11 filings compared to April 2019.

In May, as New York regained control of the virus and confirmed cases dropped to fewer than 67,000, the Chapter 11 filing rate dropped by nearly 8%. Even more surprisingly, between May and June 2020, the Chapter 11 filings fell to just 40 from 131, a 69% decrease, as confirmed coronavirus cases sharply declined in the state.

As illustrated below, Texas experienced a similar relationship between reported coronavirus cases and Chapter 11 filings.

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However, this relationship is not the same for all states. In California, another heavily hit state, confirmed coronavirus cases and Chapter 11 numbers rise and fall in their own rhythms. In fact, Chapter 11 cases steadily dropped in California from March (43) to April (30) to May (27) as confirmed cases increased from 8,221 to 41,897 to 61,821. The two only increased contemporaneously in June 2020.

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Of course, attributing the rise and fall in bankruptcy cases solely to the coronavirus and the resultant shutdowns is erroneous and would ignore the host of other problems plaguing bankrupt companies.

As discussed in a previous article, many of the recently bankrupt were suffering from financial and operational mismanagement long before the pandemic was upon us. Yet, the pandemic remains an important factor to consider as attorneys plan and prepare for an influx of bankruptcy filings.

We Want to Hear From You!

The threatened “tsunami” has not yet arrived, so there is still time to prepare. There are anecdotal stories of firms repurposing attorneys from other practice groups, and of small firms and solo practitioners repositioning themselves to serve bankruptcy clients. How is your firm preparing? Take our survey!

Please also register to join us for our upcoming webinar, featuring bankruptcy industry professionals unpacking the data and discussing their predictions for bankruptcy filings and how their firms are adjusting to the pandemic and economic downturn.

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