Legal Trends: Increased Business Bankruptcy Claims Due to COVID-19

A storm is brewing, but it isn’t a weather-related event. Instead, bankruptcy experts are predicting a flood of bankruptcy filings related to the COVID-19 pandemic. The pandemic continues to wreak havoc in the retail industry, and more major retailers and restaurant chains have filed for bankruptcy in the first seven months of 2020 than during all of the previous year. By July, more than 180 companies — including Brooks Brothers, Hertz, and New York & Co. — had filed for Chapter 11 bankruptcy protection. More sobering statistics about this legal trend:

  • According to a U.S. Chamber of Commerce poll, approximately 43% of American small businesses are likely to close permanently during the last six months of 2020. 
  • In May 2020, Chapter 11 filings in the commercial sector were up nearly 50% from the previous year. 
  • Federal Reserve chairman Jerome Powell projects that the U.S. economy will contract by 6.5% in 2020, and the International Monetary Fund predicts that the world economy will shrink by approximately 4.9% this year.

More and more struggling companies that have a realistic chance for survival are turning to Chapter 11 bankruptcy to reorganize their debt instead of Chapter 7, in which a company liquidates their assets and operations cease. This is possibly the result of assistance from state and federal programs, stay-at-home orders, or the temporary suspension of bankruptcy proceedings. However, due to the federal government’s inability to come to an agreement regarding another coronavirus stimulus package, Chapter 7 filings will likely increase, coinciding with the decrease in government aid.

Can Bankruptcy Be a Boost for a Business?

Depending upon exactly why a business has fallen into financial straits, Chapter 11 bankruptcy can actually be a positive move, giving an organization a much-needed opportunity to reorganize and create a plan to move forward in a profitable way: 

  • Under a Chapter 11 filing, a business gets a temporary reprieve from paying the bills it has accrued.
  • Many reorganization plans include a proposal to pay creditors only a percentage of the money owed. Creditors will sometimes agree to this reduction if they anticipate that doing so will keep the business afloat and net them substantial future revenue. 
  • A business that has contracts can end these agreements and use bankruptcy to renegotiate more favorable terms under a Chapter 11 reorganization.

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Final Thoughts on This Legal Trend

However, Chapter 11 offers no guarantees for beleaguered organizations. According to the Notre Dame Law Review, just 10% to 27% of all companies that file for Chapter 11 bankruptcy successfully reorganize and stay in business. Despite this, with the gradual reopening of the economy and easing of COVID-19 restrictions, there is light at the end of the tunnel for business negatively impacted by the pandemic. In order to navigate and survive these uncharted waters, businesses will need to exercise every legal option and tool at their disposal, including but not limited to Chapter 11 bankruptcy.

Interested in getting a legal expert’s take on the current state of affairs and legal trends? Tune in to our live virtual event, “Illuminating the Truth: A Conversation with Former Acting Solicitor General Neal Katyal.”