The End of the Recession? Sometimes Bad News Foretells Good

It seems we are pulling out of the recession. At least that is what I have read in the papers. (I’m nostalgic. I still enjoy the feel of paper.) Each week, however, I receive an electronic publication that monitors business bankruptcy filings throughout the country. Given all the end-of-recession news, I decided to do a cross check of the bankruptcy statistics, an exercise not unlike a funeral director reading obituaries to see where his business is going. Granted, business bankruptcy filings are not considered an official economic indicator, but they have proved reliable as a barometer throughout my career.

Although the numbers may seem counterintuitive, it turns out that we really may be pulling out of the recession. Keeping in mind that the favorite forums for business bankruptcies are New York and Delaware (not Illinois), there were 253 Chapter 11 bankruptcy filings in the Northern District of Illinois from January 1, 2009 to October 21, 2009. Compare that to the same time frame in 2008, when there were only 42 filings. These numbers don’t tell the whole story, because Chapter 7 business bankruptcies are not figured into the numbers and, again, these figures are just for the Northern District of Illinois. An even better indicator are the statistics on Chapter 11 cases nationwide.

Many experts theorize that Chapter 11 bankruptcy filings will actually increase at a very high rate once the economy improves and more capital is available. The reason is that the Chapter 11 process requires significant capital in order to sustain itself. Ironically, a business that must file Chapter 11 bankruptcy needs an entity, such as a bank, that is willing to put money into the process in order for the bankruptcy to even have a chance to work.

According to the Administrative Office of the U.S. Courts, Chapter 11 business filings increased a whopping 91 percent nationwide in the 12-month period ended June 30, 2009, compared to the same period in 2008. Likewise, business filings over the second quarter of 2009 reached the highest level nationally since the second quarter of 1993. It is hard to believe that all of these Chapter 11 bankruptcy filings are very good news for the economy. However, bankruptcy professionals whose livelihoods are pinned to the reverse cycles of the economy watch these indicators closely.

What does this mean for your business? Keep in mind that there will likely be an upturn in Chapter 11 business bankruptcies as we climb out of the recession. Therefore, as a creditor, it is more important than ever to keep your customers current on their payments. If you are a supplier of goods, being aware of your expanded reclamation rights in the context of a bankruptcy will be important; as will your understanding of which jurisdictions still allow critical vendor designations, and how you can employ setoff rights. If you are a lender, now is a good time to closely scrutinize your asset-based portfolios and tackle any reporting deficiencies that will enable you to better analyze actual risks before they become “troubled loans.” If you are a landlord, the lease, state law and the Bankruptcy Code are ordinarily your best safeguards, but it would make sense to look at other collateral (e.g., guarantees and letters of credit) to identify credit risks and determine which tenants are on the shakiest ground.

Regardless of your business sector, working with your customers and staying in regular communication with them will help you identify issues and risks. When problems do arise, staying in constant contact and keeping yourself involved as your customer works through those issues (whether in bankruptcy or otherwise) will have a positive impact on your bottom line.

This document is intended for informational purposes only and is not legal advice or a substitute for consultation with a licensed legal professional in a particular case or circumstance.

Kurt M CarlsonKurt M. Carlson | Creditors’ Rights, Insolvency & Bankruptcy Litigation & Resolution

Kurt’s practice concentrates on representing creditors, assignees and businesses of all sizes in a variety of ways, including complex business litigation, workouts, insolvency proceedings, bankruptcy reorganization cases and complex settlement negotiations. Kurt has extensive experience in a broad range of quasi-business and legal issues companies must address. If you need assistance with a related matter, contact Kurt.