Commercial Bankruptcies Surge Again, Consider Joining a Creditor’s Committee

Bankruptcies are on the rise again, a trend tracing back from December of last year. In March, new bankruptcy filings registered year-over-year increases across all major filing categories in the U.S. for the third month in a row, according to data from Epiq Bankruptcy. In fact, 42,368 new bankruptcies were filed in March, up 17% from the 36,068 filings registered in March 2022, marking the highest number of monthly filings since April 2021.

Most notably for trade credit professional, year-over-year commercial filings were up 24%. Chapter 11 cases (including Subchapter V) surged 79% compared to March 2022. Of the total commercial chapter 11 filings, the 140 subchapter V filings in March represented a 12% increase from the 125 filings in March 2022, per Epiq Bankruptcy.

“The increase in bankruptcy filings in the first quarter of the year demonstrates the growing debt burdens of both consumers and businesses,” said ABI Executive Director Amy Quackenboss. “As inflationary prices have increased in tandem with the cost of borrowing, struggling companies and households have access to a financial reprieve through the bankruptcy process.”

The rise is in private bankruptcies has been around eight per week which indicate that there’s a “rising stress in small to mid-size enterprises (SME) relative to your large bold-bracket firms,” Matthew Mish, UBS, told CNBC. This is an indicator for future credit stress because SMEs no longer have fiscal policy support and has substantial floating-rate debt from high interest rates and less funding options.

Why it Matters The surge in commercial bankruptcies is largely the result of the Fed’s rate-hike campaign, per Axios. “When money gets more expensive and lenders get pickier, the number of companies cut off from rescue capital soon rises,” reads the article. “Another measure of corporate distress—default rates—rose to 2% of outstanding U.S. leveraged debt in February (the most recent available), according to S&P Global.”

How to Protect Yourself as a Trade Creditor

One way to guard your company against additional risk from bankruptcies is by joining a creditor's committee if your customer actually files. The Bankruptcy Code authorizes the U. S. Trustee to appoint an official committee of creditors with large unsecured claims to pursue and protect the interests of unsecured creditors at large. Serving on the committee can be a highly valuable experience for a creditor but must be undertaken with a clear understanding of the corresponding responsibilities.

But finding people to fill creditor's committees has become more difficult. “Trade creditors are not being active enough or joining committees because they don’t feel like they should be allocating resources into committee membership,” said George Angelich , partner at ArentFox Schiff LLP (New York, NY), who co-leads the creditor’s committee practice at his firm. “Instead, committees are being heavily tilted in favor of landlord interests.”

The different groups that may comprise a committee are trade creditors, landlords and employees, all with a common interest of getting paid as an unsecured creditor. However, some may have an interest in accessing and promoting the provisions of the Bankruptcy Code that might maximize payments for their constituency. “It’s important for there to be balance on committees in order to ensure that the rights of all groups, parties and constituencies within the general unsecured creditor’s class are protected and treated fairly,” said Justin Kesselman , partner at ArentFox Schiff LLP (Boston, MA).

The lack of participation in committees has resulted in administratively insolvent cases, which means that trade creditors are not only getting zero for their pre-petition claim, but they are not getting paid in full for their post-petition products and services. “The thought that you’re assured to get paid your post-petition amounts, continuing to do business with the debtor can no longer be assumed,” Kesselman said. “If trade creditors not only join committees but are active and vigilant, then they can get far superior results not only for their pre-petition claim but also for protecting their rights post-petition as well.”

Join Angelich and Kesselman on May 23 for a webinar about serving on an official committee of unsecured creditors. Register now to reserve your spot!