Bankruptcy courts are getting busy as more large companies have filed for bankruptcy last month than in any January since 2010, according to Bloomberg. Bankruptcy filings were up year-over-year across Chapters 7, 11, 13, and 15 in January 2023, according to data from Epiq Bankruptcy. Total commercial filings increased 12% year-over-year, Subchapter V filings are up 49% and commercial Chapter 11 filings increased 70% … and insolvencies are only expected to pick up with a vengeance as we head further into 2023.
Several big-name stores made headlines in recent months as inflation worked its way through the entire economy—leaving no business untouched by its damaging effects. Several companies in the retail industry have collapsed, with the sector seeing bankruptcies pick up significantly. Tuesday Morning filed for bankruptcy this week for the second time in three years, Revlon filed for Chapter 11 in 2022, Party City filed bankruptcy in Texas just a few weeks ago and Bed Bath & Beyond is expected to file any day now. "I don't expect those to be the last retail bankruptcy filings of this year," said Thomas Fawkes, partner at Tucker Ellis LLP (Chicago, IL).
Other industries experiencing a rise in bankruptcies include energy, technology, real estate and healthcare said George Angelich, partner at ArentFox Schiff LLP (New York, NY). As businesses continue to feel financial pressure and file for bankruptcy, credit professionals must be proactive in order to effectively mitigate risk.
Certain countries can expect to see more businesses experience financial distress, ultimately leading to insolvency. "The upswing in business bankruptcies is already a reality for most countries, in particular for the main European markets (United Kingdom, France, Spain, Netherlands, Belgium and Switzerland), which account for two thirds of the increase," said Maxime Lemerle, senior insolvency research analyst at Allianz Trade.
Get back to the basics and reach out to customers, review terms and conditions and refresh credit applications. Then put additional protections in place, such as standby letters of credit, security agreements or credit insurance. "It's better to do that now before the situation gets so severe that the customer is unable to provide those things to you," Fawkes said.
When dealing with a customer who files for Chapter 11, credit professionals should consider joining a creditors' committee. Committees are typically made up of three or more members and any creditor that has interest can submit their name for consideration. The committee, working with the debtor, can be instrumental in helping to formulate a viable plan of reorganization.
Several committees were delayed in formation over the last few months because there was not sufficient interest, said Brian Jackiw, partner at Tucker Ellis LLP (Chicago, IL). "A U.S. trustee or bankruptcy administrator that's forming a committee doesn't have to pick only the largest creditors. So, if they get two of the largest creditors and one other creditor, they'll form the committee with a smaller creditor. Any creditor interested should proactively reach out to the trustee's office to join the committee."
When your customer files for bankruptcy, consider whether you have the ability to get yourself into a critical vendor program, which may result in you getting paid some or even all of your pre-bankruptcy claim. The catch is that as a critical vendor, you may have to abide by specific pre-petitioned terms of the debtor. "So, if you were net-60, you'll have to stay at net-60 and that's where it becomes even more critical to make sure the debtor has the liquidity to pay you," Jackiw said.
The good news is there are broader efforts to try to establish trust in the industry in the context of how commercial transactions work. "By leveraging the power of the Uniform Commercial Code, you provide greater certainty around commercial transactions in how you securitize those transactions and how creditor's rights are affected in those transactions," said Justin Kesselman, partner at ArentFox Schiff LLP (Boston, MA). "This is currently playing out across numerous states in order to implement legislation to adopt amendments to the Uniform Commercial Code both in Article 9 and other sections in addition to a new Article 12 to address these issues."
You can learn more about what to do when your customer files for bankruptcy from Angelich, Jackiw, Fawkes and Kesselman during their educational sessions at Credit Congress from June 11-14.
-Jamilex Gotay, editorial associate
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