A recent article in the Pittsburgh Post-Gazette indicates that bankruptcies are once again on the rise. With the economy in a deep recession and unemployment hovering at over 10% with no end in sight, this comes as no surprise. As an attorney that practices almost exclusively in bankruptcy, here are some of my observations about bankruptcies in the past year.
1) Increasingly, secured creditors find themselves “under water,” leaving little to nothing for unsecured creditors through traditional bankruptcy reorganization. In these trying times, 503(b)(9) “20-day” claims are extremely valuable and should always be analyzed before closing a collection file after a customers’ bankruptcy. Don’t assume that you’ll get paid through a plan of reorganization.
2) Many chapter 11 debtors are failing to reorganize due to the lack of “exit” financing in the financial market. This means that creditors doing business with chapter 11 debtors should keep credit terms tight and may want to consider having legal counsel keep an eye on the bankruptcy proceedings. Often times, legal counsel can spot a failure months in advance, allowing creditors to get paid before the debtor is forced to liquidate.
3) More and more, debtors and trustees are looking to preference actions as a means to fund distributions to unsecured creditors. This means creditors should be aware of the defenses to those actions and should review their “danger” clients to make sure that payment times are not getting too high.
4) Fraud seems to have become more prevalent than ever before. In the past, debtors relied on easy credit to fund cash flow shortages and business operations. As debtors face tight credit markets, the pressure to “cut corners” increases. As a result, we’re seeing an increase in falsified financial reports, falsified credit applications, and fraudulent billings. Creditors should be on the look-out for this behavior. Since debts obtained by fraud are not dischargeable through bankruptcy, if a creditor discovers that a debtor has committed fraud in obtaining a debt, the creditor should consider a “nondischargeability action” as a way of maintaining their ability to pursue those debts after bankruptcy.
5) More “good” companies are in bankruptcy than ever before. Previously, with some exceptions, a corporate debtor was in bankruptcy due to one of three things: poor management, a poor business model, or a failing industry. Now, we’re increasingly seeing well run companies in struggling industries (construction, steel, auto) falling victim to difficult economic times. It’s important to keep an eye on the credit terms you extend to even your best customers, as no one seems to be immune from this economy.