Business bankruptcy rise of 54% may be artificially low

Business bankruptcy filings are on the rise in South Florida as Covid-19 takes its toll on the economy, but government aid programs may be holding these numbers back from what they might otherwise be. 

Multiple high-profile businesses have already filed this year including Neiman Marcus, Lord and Taylor and 24 Hour Fitness, and these cases may well be indicative of the danger that brick-and-mortar retail and other businesses based around in-person experiences are facing as Covid and social distancing concerns rock the business landscape. 

According to a quarterly report from by the US Bankruptcy Court, Chapter 11 business bankruptcy filings in South Florida increased 54% year-over-year, from 52 in the second quarter of 2019 to 80 in the same period of 2020. Even this number, said Jim Martin, founder of ACM Capital Partners, may be artificially low due to Payment Protection Program loans and other government aid that provided many businesses with liquidity throughout the pandemic. 

“Filings are up and the data is trailing a bit,” Mr. Martin said. 

“The CARES Act and PPP provided small businesses with a cushion to continue to operate,” said Manuel Lasaga, president of economic and finance consulting company StratInfo and professor of finance at Florida International University, “(but) if we don’t recover quickly, then many of these small companies might not have the means to continue.”

In addition to traditional bankruptcy filings, many debtors that may be unable to restructure are seeking Assignments for the Benefit of Creditors (ABCs,) which allow them to liquidate under Florida state law, said Patricia Redmond, a bankruptcy lawyer at Stearns Weaver with 40 years of experience and adjunct professor and founder of the Bankruptcy Assistance Clinic at the University of Miami’s School of Law.

Small businesses and businesses run by individuals, she continued, may also seek relief under Subchapter 5 of Chapter 11 bankruptcy law, which “enables a small business to get through bankruptcy on an expedited basis with the assistance of a trustee whose role is to facilitate getting them through the system.” 

This plan often allows debtors to “restructure debt in a way that’s very positive for them,” which is especially important for small business owners who are responsible for company debts.

Another concern that businesses must be aware of, said Mr. Martin, is the possibility that the Small Business Administration will package and sell the debt from PPP loans and other assistance programs to third parties, who will be sure to crack down on the fine print in ways that could cause financial hardship for borrowers.

“It’s really important that borrowers that have taken out these loans understand what they can and can’t do with the money,” he said. “Providers that buy these loans will look for defaults, (they’re going to) hold the borrower accountable on repayment, and they’ll have the option to then increase the interest rate (if) the borrower is in default.” 

These companies have many tools, he said, to get a “nice yield on these loans at the expense of the borrower.”

According to Mr. Lasaga, the pandemic has spelled more trouble for some industries than others. The most vulnerable areas tied to the pandemic, he said, have been retail, leisure and hospitality related businesses including “restaurants and drinking places,” which were “highlighted by the lockdown.”

Even a modest recovery for these businesses, he said, hinges on a decline in coronavirus cases that would allow them to operate successfully at some capacity. A full recovery to pre-pandemic levels of success, he continued, is unlikely without a vaccine.

While the recession caused by the pandemic is indeed wrought with uncertainty, Mr. Martin said the economic effects are somewhat different than those of a more traditional recession because businesses are aware that a full recovery is dependent on a vaccine or cure, though when this might be available is another question. 

“Really what this is about is just holding on,” he said. Businesses on the edge should try to “preserve their cash in any way shape or form that they can, (think) hard about the employee base and furloughs, (and) negotiate with their landlords if they are renting space.” 

Embracing technology and saving cash, Mr. Lasaga said, are important steps for companies looking to hold on. The pandemic, he continued, only accelerated the trend toward ecommerce and touchless time-saving technology, including banking and money transfer programs.

“The sustainability of small businesses now,” he said, “hinges on how smart they are with technology.”

For those businesses considering filing for bankruptcy, Ms. Redmond urged caution and informed decision-making. “I’d advise somebody right now,” she said, “that if there was nothing that was going to cause them to file for bankruptcy immediately, to take a look and watch and see what’s happening before they made the decision.” 

“Planning for bankruptcy,” she continued, “is probably the best indicator of whether the case will be successful.” 

Though bankruptcy is often a last resort for businesses, Ms. Redmond said the system could be a valuable tool for companies that need to restructure. When a company goes out of business, she said, all is lost. Workers, creditors and owners are all better served when a business can stay afloat, which is the goal of the bankruptcy process.

“(The judges) are problem-solving judges,” she said, “they’re not just calling balls and strikes. (They) are (trying) to help a business stay alive within the framework of the law, because they know that when the company stays alive everyone wins.”