The surge in bankruptcy work that had fueled some practices during the Great Recession has fallen off, but many attorneys are hopeful that growth in transactional areas will help level the landscape.
In what probably will be viewed as good news for everyone except bankruptcy attorneys, the Administrative Office of the U.S. Courts announced last month that bankruptcy filings for the 12-month period ending June 30 fell 13 percent when compared to the 12 months ending June 30, 2012. The 1.1 million filings are the lowest amount for any 12-month period since the one ending Dec. 31, 2008.
The trend is more pronounced in North Carolina than in South Carolina, and much less dramatic in both states than in areas where the devastation of the housing crisis was more acute.
In North Carolina, the total number of bankruptcy filings for the year ending June 30 was 19,990, down from 22,699 the prior year – a drop of 11.9 percent. Bankruptcy filings in South Carolina went from 8,000 to 7,723 in that same period, a decrease of 3.5 percent.
American Bankruptcy Institute Executive Director Samuel J. Gerdano said the latest declines are part of a national trend, with bankruptcy filings dropping about 200,000 a year since they peaked in 2010.
In South Carolina, consumer bankruptcy filings – by far the most common action – went from 7,629 in 2012 to 7,460 in 2013, a 2.2 percent decline. In North Carolina, non-business filings were down 11 percent, from 21,574 to 19,211.
“In the wake of the financial crisis, there was both a pullback in credit and then households were spending less,” Gerdano said. “When consumers pull back on spending or credit is less available, a couple things happen: They clean up their balance sheets and the economy slows down.”
Less spending means less debt, which means fewer bankruptcies. Banking statistics show individuals also are saving more, said Justin H. Dion, a Massachusetts general practitioner specializing in bankruptcies. That helps them avoid financial crises in the first place and also gives them the ability to negotiate resolutions short of bankruptcy with creditors, who may be more than happy to receive partial payment from a debtor’s savings than potentially nothing from a bankruptcy case.
Pocket books are open
Christine Myatt practices bankruptcy law in the Greensboro office of Nexsen Pruet, overseeing cases in both Carolinas. She says the firm’s bankruptcy work on behalf of creditors has remained steady in the past year.
“We still have state court collection work that we continue to do, you’ve still got litigation from a collection standpoint and business litigation,” Myatt said.
She believes any dip in bankruptcy work will be offset by an uptick in transactional work. In the past few years banks that had loans on properties that might have been foreclosed on kicked the can down the road, opting for forbearance rather than foreclose because there was nobody to sell the property too after foreclosure. The economic rebound and increased lending should rev the motor on those previous stalled transactions, she said.
“Usually what happens when banks are making loans, when the bankruptcy rate is down, you go back to the lending side,” Myatt said.
Banks, hedge funds and buyers that have been stockpiling cash are now loosening up their purse strings, which is getting the transactional segment moving again, she said.
“Those markets had all been closed down,” Myatt said. “Banks have been opening up their pocket books for the last five month. I’m seeing the banks be very aggressive on this front.”
Consumers apparently are following suit, spending more as their confidence in the economy slowly returns.
“Most people, if you go back a few years, didn’t have any savings,” said Dion, who practices at Bacon Wilson and is a professor at Bay Path College. “I think because of these tough economic times, people have, as a whole, learned how to live a little leaner, more efficiently. People aren’t prospering, but I think people are surviving at a slightly higher rate than they were before.”
Dion suspects a rebound may come as early as October, the eight-year anniversary of the implementation of Bankruptcy Abuse Prevention and Consumer Protection Act. Fearing it would become more difficult and expensive to file bankruptcy after the law took effect, many individuals rushed to beat the deadline, resulting in more than 2 million filings in 2005, Dion said.
The law also extended the amount of time individuals must wait between bankruptcies, from six years to eight, meaning a large number of people with past financial problems will soon become eligible to file for bankruptcy again.
But while Dion predicts many will indeed take advantage of their right to file again, Gerdano is skeptical.
“It’s not like the cicada,” he said. “It’s possible, but then again people aren’t filing for bankruptcy just out of convenience. They’re doing it because of added debt burden that they can’t service. You don’t get that without new debt associated with increased economic activity. It’s a much longer process than simply waiting eight years and then seeing another surge.”
Business filings take big dive
While the vast majority of bankruptcies are filed by consumers, business bankruptcies have not been immune to the decline. The total bankruptcy filings dropped by 14 percent during the first six months of 2013, commercial filings alone were down 25 percent, according to data provided by Epiq Systems to the American Bankruptcy Institute. In North Carolina, business filings were down 30.8 percent, from 1,125 to 779. The drop in commercial bankruptcy filings has been sharp in South Carolina over the past year as well. Total business filings went from 371 last year to 263 this year, a decrease of 29 percent.
“Most of the filings in South Carolina were real estate related, and they all were filed probably between 2008 and 2010, so there’s probably not much left down there to file from a commercial real estate standpoint,” Myatt said. “It’s been done and worked its way through.”
Boston’s Daniel M. Glosband, a partner in Goodwin Procter’s financial restructuring practice, said that businesses, like consumers, continue to deleverage in a sustained low-interest-rate environment.
“On the business side, there was a fair amount of debt deferral that has provided a runway, and historically low interest rates have pushed off a lot of commercial filings,” Glosband said. “We expected there to be a lot more commercial activity. Except for some big ones, there wasn’t a lot of activity, and there continues not to be.”
Several law firms staffed up their restructuring teams at the beginning of the financial crisis to meet an expected uptick in Chapter 11 filings. For Weil and other firms, that luster has faded, Gerdano said.
For example, in March 2007, Skadden, Arps, Slate, Meagher & Flom told The Wall Street Journal of its plans to add 24 lawyers to its bankruptcy team, bringing the total to 120. Today, there are just 85 lawyers in Skadden’s corporate restructuring practice.