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Published in Small Business

Flood of pandemic-related bankruptcies yet to materialize

BY Sunday, September 26, 2021 06:25pm

As the COVID-19 pandemic heads into its 19th month in the U.S., bankruptcy attorneys remain perplexed about why a once-expected wave of bankruptcy filings has not yet occurred.

“I think it’s not ‘if,’ but ‘when,’” said Greg Ekdahl, partner at Grand Rapids-based law firm Keller & Almassian PLC, who specializes in both consumer and corporate bankruptcy cases. “But I’ve been saying that for a year now.”

The forecasts for the deluge of bankruptcy filings have shifted a few times. Some experts predicted companies would hold on through the last holiday season of 2020, expecting filings to emerge in the second half of 2021.

Yet no surge has materialized — quite the opposite has happened.

According to data from the Administrative Office of the United States Courts, bankruptcy filings have plummeted to lows not seen since 1985. Personal and business bankruptcy filings have dropped by 32.2 percent for a 12-month period that ended June 30 when compared to the year before. Business filings fell 17.7 percent, from 22,482 to 18,511.

Total bankruptcy filings in Michigan hovered at around 29,000 a year from 2016 to 2019. In 2020, when many would expect that number to rise, the total dropped off to 20,000. For 2021, Michigan is on pace to see just 15,000, with more than 11,000 filed to date, according to bankruptcy data provided to MiBiz.

“Banks continue to be patient, and I think that if banks are willing to work with companies, bankruptcy cases are going to stay relatively flat,” Ekdahl said. “So far, I think that’s been the case. They’ve been very reasonable and patient. At some point, that might come to an end, and if it does, I think that might be the straw that breaks the camel’s back.”

The more general consensus is that the tidal wave of cash and relief that has been injected into the economy over the last year and a half has propped up many businesses and consumers, helping them hold off what might be an unavoidable fate.

“Many clients were able to survive the last year based on the various stimulus packages and injecting capital into their companies by selling assets, liquidating retirement accounts or mortgaging their homes,” said Steve Bylenga, a partner with Grand Rapids-based CBH Attorneys & Counselors PLLC.

“However, now many of those small business owners have exhausted their options under the stimulus programs and exhausted their options to inject capital,” he added. “Accordingly, I anticipate that filings will go up within the next three to six months.”

Scott Chernich, an attorney and shareholder with Foster, Swift, Collins & Smith PC who’s one of three appointed trustees for the U.S. Bankruptcy Court for the Western District of Michigan, said a deluge of bankruptcy filings isn’t necessarily imminent after government support for businesses.

“If you (used a PPP loan) right, that money is forgiven,” Chernich said. “For the lack of a better term, that’s a handout from the federal government to everybody. So, the businesses that got the PPP money, if they’re not too cyclical or too retail in nature, I think most of them have survived this pandemic because of that.”

New law proves effective

The Small Business Reorganization Act (SBRA) of 2019, known as Subchapter V of the U.S. Bankruptcy Code, has been a game-changer for some small businesses since it was passed by Congress in 2019 and took effect in February 2020.

The SBRA was also recently extended in March when President Biden signed the COVID-19 Bankruptcy Relief Extension Act. Now, the SBRA won’t expire until March 27, 2022.

The SBRA was created to help save small businesses through bankruptcy by reducing the cost and time of a typical Chapter 11 filing while allowing owners to retain a stake in the company.

While it stands as a far less arduous route for bankruptcy, few companies have actually filed under the new measure. Ekdahl’s firm has filed just three of those cases, which is the most of any practice in the Western District of Michigan.

The firm has represented Walker-based plastic injection mold manufacturer Krieger Craftsmen Inc. and Allendale-based plastics manufacturer Jimdi Plastics Inc. 

“I thought more people would jump on that as a relief option,” Ekdahl said. “But as a general rule of thumb, there has to be a reason to file, and right now there isn’t.”

However, Bylenga argued that the SBRA has still proven effective, albeit in a different way. Previously, when small businesses would threaten creditors with a potential Chapter 11 bankruptcy, creditors wouldn’t balk, knowing that route was not always accessible to many small businesses.

Under the SBRA, creditors know that small businesses have a viable path through the bankruptcy process and are more apt to negotiate.

“The leverage provided by the threat of reorganization under SBRA benefits small business owners as much, if not more, than actually filing a Subchapter V,” said Bylenga, whose firm represented Grand Rapids-based retailer Purple East Plus Inc. in the first Subchapter V case in the Western District of Michigan. “Over the last year, we’ve worked with a number of small business owners to utilize the threat of a Subchapter V to successfully reduce their liabilities.”

As the economy nears the two-year mark of COVID-19, some business owners continue to hold on with the thought that the unprecedented health event and its effects on businesses will eventually subside.

“Small business owners are eternal optimists,” Bylenga said. “They believe that they are one deal away from everything working. The last thing they want to do is file a bankruptcy. Therefore, when we meet with a small business owner, our goal is typically to find a way to avoid bankruptcy.” 

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