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Prepare for a Surge in Bankruptcies if the Pandemic Continues

Published: November 9th, 2020

By: Denise D. Dell-Powell

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Since bankruptcies usually rise with unemployment, we anticipate we will see a surge of consumer and commercial filings in early 2021 if we don’t stop the spread of COVID-19 and its ravaging effects on the economy. We already have seen high-profile bankruptcies in the retail and hospitality industries, and that may be a harbinger of what is to come in other sectors of the economy. Florida, with its reliance on tourism, is particularly vulnerable as people continue to postpone travel and vacation plans.

Through mid-August, at least 25 major national retailers had filed for bankruptcy protection, according to a report by accounting and consulting firm BDO. The list includes iconic names such as Neiman Marcus, Lord & Taylor, Brooks Brothers, JCPenney and GNC. These 25 retailers operated a total of more than 13,000 stores at the time of their filings, the report noted. Overall, at least 157 companies across the United States with liabilities of more than $50 million filed for Chapter 11 reorganization through mid-August, according to BankruptcyData.com.

In some cases, businesses were already struggling, and the pandemic pushed them over the edge as customers stopped coming through the doors. In other instances, businesses were humming along when the pandemic hit, abruptly shutting them off from their lifeline of foot traffic and throwing the brakes on consumer spending. As with everything else with the pandemic, it’s hard to predict how long we will have to live with virus restrictions and the resulting impact on the economy, but we have to assume the recovery will be gradual. Unfortunately, that recovery may not come soon enough for businesses that have already run out of government stimulus money or will do so at the end of the year.

Business as Usual for Bankruptcy Courts

Florida and other states have lifted restrictions on foreclosures and evictions with respect to individuals, the effect of which will be a surge in foreclosure and eviction suits and bankruptcy filings. It is anticipated that in South Florida, filings will increase by 100% in 2021. The bankruptcy courts in Florida are operating as usual, with virtual hearings and no apparent disruption to their normal efficiency.

Barring any new round of government stimulus money or the mass distribution of a vaccine in the next few months, we may see a surge of filings in the first quarter of 2021 as businesses become tapped out and the cumulative effects of layoffs and rising unemployment become evident. Disney’s September announcement of 6,700 layoffs in Orlando should sound the warning bell for Central Florida.

Patience and Flexibility May Be Creditors’ Best Strategy

If you are a lender or creditor, the best path forward may be to work with businesses that are struggling as a result of the pandemic. Assuming they were doing well before the pandemic, they likely will recover when daily life returns to normal.

How you work with a business depends on many factors and can include modification or forbearance of loans, or partial or delayed payments on rent and other debts. In most cases, forgiveness of debt should be a last resort, if it is even considered. Unless your business’s obligations are going away, it will not be prudent to wipe the slate clean for loans, leases and other obligations owed to you. Your goal ultimately is to collect on all debts. As with any contract, don’t enter into modifications without your lawyer signing off on them.

Since every situation is different, we recommend that you devote extra time to monitoring debtor businesses. You will want to know if their problems really are caused by the pandemic, or if there are other management or market conditions that have caught up to them. You also will want to see how they are managing through their current troubles and assess how likely they are to become viable after the pandemic passes. In addition, consider what position you will be in if the business does file for bankruptcy protection. In other words, assess whether it is a good business decision on your part to be patient or if you are only postponing dealing with a business’s inevitable collapse.