It’s a Good Time to Be a Bankruptcy Lawyer…Right?
by Tricia R. DeLeon and Lauren C. Kessler
Blockbuster, Borders and the Texas Rangers all filed bankruptcy within the last year. Despite these newsworthy debtors, fewer businesses sought bankruptcy protection under Chapter 11 in 2010 and 2011. Is this an indication of healthier economic times? Probably not. Consumer bankruptcies continue to rise. The Honorable Barbara Houser, Chief Judge of the United States Bankruptcy Court for the Northern District of Texas, said that while bankruptcy filings may be “leveling out,” she does “not see an end in sight.”
Did Bankruptcy Filings Peak in 2009?
In 2009, the Northern District of Texas’ total bankruptcy filings increased by 30 percent when compared to the number of filings in 2008 and by 35 percent compared to the 2007 filings. Bankruptcy Statistics, Northern District of Texas, www.txnb.uscourts.gov/Clerks-Office/Bankruptcy-Statistics (annual & monthly filings). This increase coincided with the economic downturn and mirrored the country’s financial instability. Since 2009, however, total filings have increased only 1.86 percent, and the data for 2011 suggests that filings will be about the same or less this year.
Why Have Large Chapter 11 Filings Declined?
Corporate restructuring filings have slowed in 2011, but there are no clear reasons why. In 2008, 1.6 percent of total bankruptcy filings in the Northern District of Texas were under Chapter 11. In 2009, that number rose to 2.24 percent. There have been 88 bankruptcies filed under Chapter 11 from January to March 2011, compared to 100 filings for the same months in 2010.
According to Judge Houser, “Chapter 11 filings are down everywhere and the average size of the largest [Chapter 11] cases is getting smaller.” She is right. The Association of Insolvency & Restructuring Advisors’ Journal noted that 94 percent of the Chapter 11 cases filed in 2010 were smaller than those in 2009. AIRA Journal, Vol. 25, Jan. 2011. If smaller companies are filing bankruptcy, there is less work for lawyers, investment bankers and financial advisors.
Judge Houser also notes a “shift in creditor constituencies. Now creditors are often strategic buyers of distressed debt who understand the bankruptcy process and its expense. These creditors want to avoid putting companies in bankruptcy or, if necessary, will run the company through a more efficient 363 sale.”
Do decreased business bankruptcy filings signal the end to a recession? Not necessarily, according to turnaround specialist William Snyder of CRG Partners. “Recessions are like pandemics, the weak die first—the remaining companies are either alive due to the recovery or the banks’ unwillingness to push them to a solution,” said Snyder. In other words, just because businesses are staving off bankruptcy does not mean they are financially stable. According to Snyder, “It is a matter of time before the fulcrum lenders demand action.”
Consumer Filings Are Still on the Rise.
Consumers still significantly outpace businesses when it comes to filing for bankruptcy protection. Consumer bankruptcies comprised 92.91 percent of filings in 2010. United States Courts Bankruptcy Statistics, www.uscourts.gov/Statistics/BankruptcyStatistics.aspx.
Individuals generally have two choices when it comes to filing bankruptcy, Chapter 7 or 13.
Under Chapter 13 an individual must pay a portion of the debts before receiving a discharge, while Chapter 7 basically results in an immediate discharge of debts.
To file under Chapter 7, a debtor must pass the “means test,” which compares the debtor’s potential excess future earnings with allowable expenses. 11 U.S.C. § 707(b). Unemployment often enables a consumer to satisfy this test. However, Judge Houser explains that the means test is “not a big club” because few households have incomes above the national median.
Judge Houser believes more consumers choose Chapter 13 to keep their homes. In a Chapter 7, it is difficult to keep a home without lender cooperation. Thus, while there is some shift between the number of consumers who file under Chapter 13 versus Chapter 7, a better indicator of the economic condition is consumer filings as a whole. The number of consumer bankruptcy filings in the Northern District in 2010 increased 33 percent from the number of consumer filings in 2008. Furthermore, a high number of consumer bankruptcies is not surprising because unemployment still hovers around 10 percent and many families lack medical insurance.
Fewer Bankruptcies Do Not Equal a Healthier Economy.
A decrease in bankruptcy filings should signal a healthy economy, but remember the total number of filings is still the highest it has been in recent years. Although corporate restructurings have declined, consumer filings remain high. While it is not clear what, if anything, a decrease in corporate filings signal, consumer bankruptcies seem to indicate the economy has not yet recovered.
Tricia R. DeLeon and Lauren C. Kessler are attorneys at Bracewell & Giuliani LLP. They have experience in bankruptcy litigation, particularly preference actions. Both are members of the Dallas Bar Association and the DBA Bankruptcy Section. They can be reached at firstname.lastname@example.org and email@example.com, respectively.