Are Fewer Bankruptcies Good News? Maybe
Baldiga
According to statistics provided by the U. S. Bankruptcy Court in Massachusetts, individual bankruptcy filings decreased significantly for the year ending June 30. Chapter 7 liquidation cases decreased more than 6 percent, and individual Chapter 11 (reorganization) filings fell by more than half. Chapter 13 filings, filed mostly by individuals with steady income who want to save their homes, have stayed about the same.
On the business side, Chapter 7 liquidation filings decreased approximately 13 percent, while the number of Chapter 11 business reorganization bankruptcy filings more than doubled. For the 2012 calendar year, however, the number of Chapter 11 business filings is trending downward, having dropped 14 percent through the third quarter.
What do these numbers portend, if anything, for the year ahead? The financial pressures on businesses, as well as on individuals and families, remain severe, with many still out of work amid a cost of living that remains high. The news isn't all bad, however: mortgage lenders are modifying more mortgages — some at a faster pace. This is allowing more homeowners to retain their properties and avoid the often-crushing debt left by foreclosure. Also, the real estate market seems to be stabilizing and values are trending upward, creating equity again and providing a lift in a key indicator of economic health. That has, in turn, boosted consumer confidence.
On the business side, while there have been fewer business bankruptcy filings thus far in 2012, the gross numbers are still high: Hundreds of businesses have filed for some sort of bankruptcy protection in Massachusetts, most of them small to mid-sized entities still suffering from the recession's toll.
Is this downward trend in filings evidence of a strengthening economy? Or is it attributable to other factors? For example, lenders may be continuing to hold onto troubled business loans to avoid the write-downs and administrative expense and hassle related to calling them. Similarly, there appears to be an increase in out-of-court restructurings, liquidations and secured-party sales in which lenders seek to avoid the expense and delay inherent in borrower bankruptcy cases. These factors would decrease the number of reported bankruptcy filings without necessarily signaling economic strength.
It's difficult to predict where the economy — and bankruptcies — will be headed in 2013. The European crisis continues to unfold, and many economists continue to discuss the prospects of a double-dip recession, particularly if the "fiscal cliff" negotiations fail. Also, credit availability remains tight for businesses under financial duress. With stronger borrowers emerging and five years having passed since the start of the recession, lenders may be less willing to show leniency to under- or non-performing business borrowers and instead more actively pursue defaults and collection against both businesses and individual guarantors of business loans. With so many threats to struggling companies, it would not be surprising to see an uptick in both business and individual bankruptcy filings in 2013.
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Joseph H. Baldiga is an attorney with Mirick O'Connell in Worcester who specializes in business bankruptcy law.
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