Businesses and Consumers Face Choices as Bankruptcies Increase

November 06, 2010

In New Jersey, the total number of bankruptcy filings increased over 25 percent in the year that ended on June 30. This increase exceeded the national average of 20.4 percent. The national figures included 1.51 million consumer bankruptcy filings and 59,608 business filings.

Extent of Business Bankruptcy Filings

These figures are not surprising, given the tough economy of the last few years. What is surprising, however, is that the increase in bankruptcy filings has not necessarily translated into more work for law firms that handle Chapter 11 bankruptcy reorganizations for businesses. This is the case both in New Jersey and elsewhere around the country.

The number of Chapter 11 filings has more than doubled nationally in the past five years, reaching over 14,000 last year. But the economy has been so bad for so long that many companies have decided to liquidate entirely rather than reorganize through Chapter 11 for a fresh start. Concerns among business owners about the high retainer fees that some law firms require to do reorganization work are also a factor that contributes to number of Chapter 11 cases being lower than one might expect.

Could it be that some businesses are pulling the plug too soon when choosing to liquidate rather than reorganize? It's true that economists do not expect dramatic improvement in the economy anytime soon. The bad economy has made many people less optimistic than before. As a result, the perception among businesses is often that, as one attorney put it, what is needed is not a lawyer, but a priest. With that kind of mindset, businesses typically choose to liquidate under Chapter 7 bankruptcy , rather than try to reorganize.

The increase in the number of Chapter 7 filings reflects this type of thinking. Nationally, the number of Chapter 7 filings was up 25 percent in the last year. The figure increased from 907,603 in the year that ended on June 30, 2009 to 1,133,320 in the most recent year.

Reorganization as a Viable Option

But amid the struggles of the economy, there are also many opportunities. Businesses can still use Chapter 11 to remain in control of the business while it is reorganized under court oversight. They can still benefit from the automatic stay provided by a Chapter 11 filing. This prevents creditors from bringing new lawsuits aimed at the business. Until the bankruptcy case is resolved, it also stops any litigation that may already be pending against the business.

Nationally, however, Chapter 11 filings rose only about two percent in the last year, to a total of 14,272. Though this figure represents a doubling in the last five years, it is not nearly as much as might be expected, given the general downturn in the economy.

Chapter 11 is not the only type of reorganization that is possible under the bankruptcy code. Certain individuals may qualify for Chapter 13 bankruptcy , which allows the debtor to reorganize debts and pay them off over a period of three to five years. Chapter 13 bankruptcy is often used by individuals facing foreclosure who are seeking to save their home. Chapter 13 filings are up over 10 percent in the last year, to over 424,000. That is a 35.5 percent increase in the last five years.

The total number of bankruptcy filings also includes Chapter 12, which is for family farmers and fishermen. Those filings, however, are only in the hundreds, a small portion of the overall total.

How a Skilled Lawyer Can Help

Knowledge of the bankruptcy laws is not enough. Effective work in the field requires the type of knowledge that really comes only with experience and daily interaction in the bankruptcy courts. Such a lawyer can counsel clients carefully on what their options are and the likelihood of success of different reorganization strategies. The best option may or may not be to file for one of the forms of bankruptcy. That decision is best taken based on the facts and circumstances of a particular case, and statistics on the prevalence of bankruptcy following the Great Recession are a limited guide.

Article provided by Scura, Mealey, Wigfield & Heyer LLP
Visit us at www.scuramealey.com