Bankruptcy filings, both for businesses and consumers, were in a steady decline since 2010 and leading to the COVID-19 pandemic. Then when the pandemic hit, many Courts imposed moratoria on foreclosures and evictions, thus eliminating the reason many businesses and individuals file for bankruptcy protection. Additionally, PPP loans and stimulus funds were made available by the government which further helped troubled businesses and individuals work through, or at least delay, their financial distress. Those that were still in trouble were aided by a general sense by many creditors to try to work with their borrowers, either out of some empathy for their situation, or perhaps, because the end result of pursuing their rights as a lender would mean they would simply get their collateral assets back, which may not be worth a lot during a pandemic.
As a result, bankruptcy filings have continued to decline during the pandemic. Nationally, total bankruptcy filings have dropped approximately 40% in the first quarter of 2021 compared to the same quarter in 2020. Locally, a similar decline is evident, with filings off nearly 30% quarter to quarter in the Middle District of Florida.
While many experts in the bankruptcy and restructuring community have been predicting, for quite some time, a coming wave of bankruptcy filings, that tsunami remains offshore for the time being, held up by the continued pandemic, stimulus/PPP payments, and legislative action by Congress. On March 27, 2021, President Biden signed the “COVID-19 Bankruptcy Relief Extension Act” which extended provisions that were enacted in the 2021 CARES ACT that provided various protections to financially distressed consumers and small businesses. The most significant of these protections was to extend through March 2022 the $7.5 million debt limit for those small business debtors that choose to file under the new “small business chapter 11” provisions of the Bankruptcy Code. The non-pandemic debt limit was $2.5 million, meaning that a much larger number of small businesses now qualify for this election, which provides significant benefits to debtors seeking to reorganize. In the Orlando Division of the Middle District, a large percentage of the recent Chapter 11 cases are filed under these provisions. Local attorneys and Judges have commented on the positive success rate of these cases, as well as the reduced expenses incurred compared to a typical chapter 11, which was one of the primary goals of the new “small business chapter 11” provisions.
As with all things related to the unprecedented COVID-19 pandemic, we are in uncharted waters. If those waters include a bankruptcy tsunami on the horizon, it remains out at sea, but how far offshore and how quickly it may come ashore once the pandemic subsides, is anybody’s guess.