Steve Weiss says the wave of bankruptcies that he and others in his line of work are expecting certainly hasn’t reached shore yet, to use a phrase appropriate for this time of year.
“But you can definitely see it building out there — it’s coming; you can see it rolling in,” said Weiss, who specializes in bankruptcies and workouts for the Springfield-based law firm Shatz, Schwartz & Fentin.
This wave is comprised of both corporate and consumer (personal) bankruptcies, and it will be large and hit with considerable force, he went on, adding that a number of factors are colliding that will make it so.
On the corporate side, while many companies have been able to hang on and survive the pandemic to date, they have done so thanks largely to government stimulus initiatives that are due to be exhausted soon, leaving business owners and managers wondering how they will pay people and all their bills. And on the consumer side … it’s a very similar story.
Indeed, unemployment benefits and stimulus checks have helped many make ends meet, but those checks are projected to end soon for large numbers of people, if they haven’t ended already.
“My phone is starting to ring more with business owners who are either unsure how they’re going to make it, or are sure they can’t — the virus has just clobbered their business,” said Weiss, who said his next phone call after the one with BusinessWest was with a business owner looking to talk about bankruptcy or perhaps liquidation.
“My phone is starting to ring more with business owners who are either unsure how they’re going to make it, or are sure they can’t.”
Such calls are starting to come in with increasing frequency, said Mike Katz, a partner with the Springfield-based firm Bacon Wilson and one of the region’s pre-eminent bankruptcy specialists. He used a different, though similar, metaphor to describe what’s coming.
“I think the dam is about to break — we’re on the cusp of a tsunami of bankruptcies,” he said. “It hasn’t happened yet, but it’s going to happen.”
There have already been many, especially on the corporate side, he went on, noting that many large and famous names, many from the retail sector, have filed for Chapter 11 protection. That list, which continues to grow, includes Lord & Taylor, J. Crew, Brooks Brothers, Gold’s Gym, Neiman Marcus, JCPenney, Hertz, 24-Hour Fitness, Chuck E. Cheese, California Pizza Kitchen, and Men’s Wearhouse.
Those names reveal the types of businesses that are most in jeopardy, Katz continued, adding that, locally, many small businesses in the hospitality, retail, and fitness realms — but many other sectors as well — face severe challenges as they try to survive the pandemic.
For some in this category, an emerging option is what’s being called the ‘fast-pass’ small-business bankruptcy process, otherwise known as Subchapter V of Chapter 11 of the Bankruptcy Code. This new subsection, which became effective in February, is not a response to COVID-19, but certainly seems to be tailor-made for the economic crisis the pandemic has created.
That’s because, as the name suggests, it is a faster, less expensive Chapter 11 reorganization path, designed specifically for much smaller businesses than those that seek the Chapter 11 route. To be eligible for Subchapter V, an entity or an individual must be engaged in commercial activity, and its total debts — secured and unsecured — must be less than $7.5 million, a new number (the old one was $2.725 million) resulting from provisions of the COVID-inspired CARES Act. At least half of those debts must come from business activity.
Katz and others we spoke with said the fast-pass option holds potential for some businesses, but there are challenges within its many provisions, including the need to come up with a reorganization plan within 90 days of the filing. Such plans may be difficult to develop given how difficult it is to see even a few weeks down the road, let alone several months, because of the pandemic.
“The one downside is you file your bankruptcy papers, and you’re required, within 90 days, to put a plan in place,” said Mark Cress, a bankruptcy specialist with the Springfield-based firm Bulkley Richardson. “That’s a short window, and a lot of small businesses are barely holding their own.”
For this issue and its focus on law, BusinessWest talked with these bankruptcy lawyers about what they can already see coming. They can’t predict when this particular surge will begin, but they say it’s almost unavoidable.
Chapter and Verse
While Katz and Weiss were crafting analogies to waves and tsunamis, Cress wanted to draw parallels to the Great Depression.
Indeed, he told BusinessWest that the current conditions rival, and in some cases (such as the quarterly decline in GPD) actually exceed those of the Great Depression that started roughly 90 years ago.
“This is worse than the Great Depression in a lot of ways,” he said. “The dip in the economy — it dropped by a third — was something we’ve never seen before. And but for the way the Fed has handled this, it would be devastating; those multi-trillion-dollar programs … they’re the only thing that’s sustaining us. Without that, the whole house of cards would collapse.”
To further state his case — that’s an industry term — Cress pointed to numbers contained in an analysis authored by Morning Consult economist John Leer, who noted that, without additional funding, millions of unemployed Americans are at risk of financial insolvency by the end of this month.
“The personal finances of workers who have been laid off or placed on temporary leave since the onset of the pandemic deteriorated in July,” Leer wrote. “The July survey found that 29% of unemployed and furloughed workers lacked adequate savings to pay for their basic living expenses for the month, up 16% in June. This monthly change contrasts with June, when the finances of laid-off and furloughed workers improved. At that point in time, many renters and homeowners took advantage of the rent-deferral and mortgage-forbearance options included in the CARES Act, thereby driving down their monthly expenses.”
Cress backed up that commentary with some other, very sobering numbers regarding renters.
“One-third of all renters weren’t able to make their July rent,” he noted. “And more than 60% were concerned they won’t make August. So you can imagine the ripple effects this will have … many small-time landlords, with one or two tenants, may not be able to pay their mortgage.
“And you if get enough defaulted mortgages … then banks start to pull in their horns, and all of a sudden the credit markets freeze up, and you have a real disaster,” he went on, drawing analogies, again, to what happened nine decades ago.
Looking at these statistics and possible scenarios, it’s easy to see why bankruptcy lawyers are expecting a wave, or tsunami, of personal bankruptcies to hit this area — and the nation as a whole — soon, with ‘soon’ being a relative term.
“Some people are getting unemployment benefits, but it looks like that’s ending,” said Weiss. “There’s a foreclosure and eviction moratorium that’s ending in October, and there are already people living on credit cards and exhausting their savings just trying to get through this — and it’s going to be a while before jobs come back.
“So it’s a matter of sooner than later,” he went on. “And bankruptcy is something of a trailing indicator; it takes people a while to get the point where they need to file for bankruptcy — the credit-card bills don’t become unmanageable until several months go by.”
By the Numbers
But the wave will almost certainly involve corporate bankruptcies as well, said those we spoke with, noting that many businesses have struggled to merely survive the past five months. And with the state already pumping the brakes on its reopening plan as reported cases increase, and ever more uncertainty about the future, survival is becoming more of a question mark for many businesses.
That’s especially true within the restaurant sector, said those we spoke with, noting that, while many have been able to reopen, their revenues are still a fraction of what they were pre-COVID. And with fall and then winter coming — meaning far fewer opportunities to serve outdoors — some in this sector are wondering if, and for how long, they can hang on.
“I think the dam is about to break — we’re on the cusp of a tsunami of bankruptcies. It hasn’t happened yet, but it’s going to happen.”
“I’ve been contacted by a number of restaurants, in particular, over the past few months,” said Katz, adding that there have been inquiries from those in other sectors as well. “Some of these have managed to hold on, some have closed some locations while keeping others open … but the number of people I’ve talked to just today tells me that the dam is just teetering, and I think there’s going to be unprecedented times in the bankruptcy field.”
This speculation leads him back to the new fast-pass small-business bankruptcy process, and questions about just how many businesses may try to take advantage of this emerging option, and whether they can be successful with such bids.
“I think a lot of businesses will try doing this because you have a 90-day maximum to get in and get out — that’s how fast this Chapter 11 is going to go,” he explained. “And the whole thing is predicated upon the fact that you only have to propose a plan that provides more to the creditors than they would receive in a liquidation, with no voting.
“Under the current Chapter 11 process, there’s a whole voting process, where you have to get two-thirds of the dollar amount and a majority of the number of creditors to vote in favor of it,” he went on. “But with this process, there’s no voting — it’s a much more streamlined process, and it’s far less expensive.”
With the new ceiling of $7.5 million, many more businesses are now eligible to take this route. But that same 90-day in-and-out period, while attractive in one respect, is daunting when it comes to actually putting a reorganization plan in place.
“I’ve talked with a number of people about it because people are still trying to figure how it works — there isn’t a lot of legal guidance or precedence,” said Cress. “But having to put a plan together in 90 days is going to be very difficult for many small businesses. If you don’t have any profits or any cash and you’re living hand to mouth, it really places an undue burden on you to figure it all out and get creditor sign-off in 90 days.”
Katz agreed. “Most traditional Chapter 11 cases are multi-year, and reorganization is based in projections,” he told BusinessWest. “How do you project when this COVID situation is going to change? If you’re a restaurant, how can you project when people are going to come back to your restaurant and you can go back to something approaching capacity?”
The Bottom Line Is the Bottom Line
Those lawyers we spoke with all expressed a desire not to sound like an alarmist.
But as they talked about what they’re seeing, reading, and hearing on the phone calls they’ve already taken, they admit it’s difficult not to take that tone.
“For many businesses, it’s a matter of survival at this point,” said Cress, noting that survival is becoming more difficult in some sectors with each passing month. “It’s becoming apparent that the recovery is not going to happen as quickly as some had originally hoped, and the effect is going to be much deeper and longer-lasting than people are even letting on.”
And one seemingly unavoidable consequence of all this is bankruptcies, on both the corporate and consumer sides of the ledger.
As Weiss said, the wave hasn’t crashed ashore yet, but if you look — and you don’t have to look hard — you can see it building.
George O’Brien can be reached at [email protected]