While business bankruptcies have hit historic lows since the Great Recession, market developments and changes in the legal landscape suggest these numbers are due to rise. First, the statistics: The Administrative Office of the U.S. Courts (AOUSC) reports that a total of 789,020 bankruptcies were filed during the 12-month period ending December 31, 2017. Of that number, 23,157 were business bankruptcy filings. Per the AOUSC, bankruptcy filings took a small dip in 2017 as compared to 2016: 24,114 business bankruptcies were filed in the 12-month period ending December 31, 2016, out of a total of 794,960 filings. However, the number of local bankruptcy filings—in particular, chapter 11 filings, or business reorganization cases—bucked the national trend for 2016 and 2017. A total of 146 chapter 11 cases were filed in the Northern and Eastern Districts of California in 2016. That number rose to 169 in 2017, and very well may continue to rise.
Retail was one of the most distressed industries in 2017 and is struggling to stay afloat in 2018. Footwear companies like The Walking Company and Rockport Group filed for chapter 11 protection in 2018, as did several women’s fashion retailers including Claire’s and Nine West. Moreover, Toys “R” Us filed in 2017, and in one of the largest retail bankruptcies of all time, may close all 800 of its U.S. stores. Per AlixPartners’ 2018 annual survey of restructuring experts, retail continues to be hit hard due to factors including (i) evolving consumer preferences, (ii) the onslaught of Amazon and other online competitors, and (iii) excessive debt coupled with the inability to refinance. As a result of this perfect storm of retail woe, retail corporate defaults reached an all-time high in the first quarter of 2018 according to Moody’s.
The Tax Cuts and Jobs Act of 2017 may also prove problematic for some business owners. As PWC explains in its restructuring outlook for 2018, the Act caps business interest deductions at 30% of earnings before interest, depreciation, taxation and amortization, with some exceptions. The imposition of this cap will limit some businesses’ ability to offset corporate interest expenses against their taxable income. As a result, highly indebted companies already struggling with profitability may consider bankruptcy to deal with mounting debt. In addition, the Act now disallows net operating loss carrybacks, which companies previously might have used to offset taxable income and potentially recover past tax payments. Businesses which looked to tax refunds as a source of corporate liquidity may therefore feel the pinch going forward.
Finally, rising interest rates may result in more business bankruptcies in 2018 and beyond. American Bankruptcy Institute Executive Director Samuel J. Gerdano believes that more debt-burdened businesses may seek bankruptcy protection as interest rates increase and the cost of borrowing rises. We are inclined to agree.
Business bankruptcies give rise to special issues for commercial lenders, landlords and tenants. In retail bankruptcy filings, issues such as the calculation of a landlord’s claim for future rent under rejected long-term leases in a tenant’s bankruptcy, or the evaluation of a tenant’s rights to retain its leasehold interest when a commercial landlord files and seeks to sell its property in a sale of substantially all of its assets, may take center stage. And in any business bankruptcy where the debtor hopes to emerge as a going concern, lenders must examine the debtor’s current and projected cash flow and operating expenses both in evaluating the debtor’s proposed uses of cash collateral and determining how to vote on the debtor’s reorganization plan. Regardless of the industry, our experienced financial institutions and creditors’ rights team stands ready to help you navigate the rising tides of business bankruptcy filings, and formulate strategies to maximize your recovery in these uncertain times.