2020 continues to be a strange year for bankruptcy filings

So far for the year, the volume of 2020 bankruptcy filings in Idaho is running at 80% of those for 2019. Like the rest of the nation, Idaho’s personal bankruptcy filings are measurably down from previous years.

Chapter 11 reorganization is main form of corporate bankruptcy filing. In Idaho, there have been very few Chapter 11 cases in 2020, which is at odds with national trends where Chapter 11 cases were up 78% for September compared to the same period the year before. For the first three quarters of 2020, Chapter 11 commercial filings are up 33% versus Q1 through Q3, 2019.

In June, national bankruptcy expert Robert Lawless of the University of Illinois told the Idaho Business Review: “All bets are off for how COVID-19 will affect bankruptcy rates.” He was right.

According to the American Bankruptcy Institute, Idaho’s per capita bankruptcy filing rate is close to the national median, with a state rank of 23rd. In October 2020, 192 bankruptcies were filed in Idaho: three were Chapter 11 reorganizations for one individual and two sole proprietors, 11 were Chapter 13 personal reorganizations, and the rest were Chapter 7 liquidations, including the month’s only corporate filer, a small metal fabrication business in Canyon County. Usually Chapter 11  is used by incorporated businesses but some individuals have enough assets that they fail the means test for Chapter 13 eligibility and are forced into Chapter 11 instead.

The number of Idaho filers in October was down slightly from September’s 204 cases and August’s 198 cases.

Eight of September’s filing were for Chapter 11, four of which were for businesses. Over 95% of the month’s filings were Chapter 7 liquidations, all personal with no business cases. This is typical for Idaho whose bankruptcy cases have averaged over 90% Chapter 7 liquidation for more than a decade.

Bankruptcy numbers were slightly higher in the spring and early summer of 2020: 253 filings in July, 250 in June, 232 in May, and 229 in April. Through October, this year’s bankruptcy filings are averaging 233 per month. Again, most of Idaho’s cases were Chapter 7 liquidations for individuals. Chapter 11 filings in Idaho continue to remain scarce.

In comparison, 3,545 personal bankruptcy cases were filed in Idaho in 2019, which is around an average of just over 295 cases per month.

Bankruptcy experts believe the current drop in personal filings is due to the CARES Act and other government stimulus and relief programs. “Non-commercial bankruptcy filing activity continues to decline since the beginning of the COVID-19 global pandemic,” Chris Kruse, senior vice president of Epiq AACER said in a news release in October. Epiq is a vendor of legal and economic bankruptcy statistics. “Regulatory programs have effectively kicked the can down the street by injecting liquidity into the market, delaying new bankruptcy filings.”

Kruse’s views on a delay of personal bankruptcy filings were shared by Lawless: “Certainly few expected bankruptcy rates to drop, though they did … It’s consumer debt that leads to bankruptcy. Because of the pandemic, payment moratoria and forbearance may help some in debt to avoid bankruptcy because it lets them spread the financial pressure over time.”

In May, after the amount of distressed debt surged 161%, the American Bankruptcy Institute told its membership that: “The COVID-19 pandemic looks likely to cause the biggest surge in bankruptcies that the U.S.’s court system has ever experienced.”

Idaho Business Review staff have attended some of the informal bankruptcy networking sessions hosted by ABI since the beginning of the summer, where many professionals have shared similar views on a delayed reaction in personal bankruptcy filing. “It’s like a tsunami,” one bankruptcy judge from Louisiana remarked in August, “the water drops a bit before the tidal wave comes to flood you out.”

The divergence between the drop in personal filings and the increase in commercial bankruptcy cases can be attributed to at least two different phenomena. First, out of the 94 bankruptcy courts in U.S., the Delaware bankruptcy court is by far the venue of choice for national firms shopping for the most friendly forum to restructure debt, especially if they had incorporated in corporation-friendly Delaware, a favorite of big businesses.

Next, the other thing that adds a skew to Chapter 11 statistics is the fact that every daughter business of a corporation with a separate corporate filing in each state where the parent does business must file its own Chapter 11. For example, Frontier Communications was responsible for 90 of the 405 chapter 11 filings in April; Gold’s Gym was responsible for 13 of the 334 filings in early May; and in October, Mallinckrodt Pharmaceutical filed over 60 Chapter 11 cases in its attempt to reorganize and discharge its debt after being saddled with so many adverse judgements in opioid liability cases.

Though Chapter 11 numbers are always skewed, it is still clear that when counting by parent company, Chapter 11 proceedings have increased in at least one field: retail. In 2019, 18 national brands sought Chapter 11 protection from creditors, more than any year since the recession of 2008.

In 2020 through the end of October, over 30 national brands have filed for Chapter 11 bankruptcy. Some of these, like Pier 1, A.C. Moore, and the oldest department store in the country, Lord and Taylor liquidated their assets and went out of business forever. Others, like J.C. Penney, founded in 1902 just over the Idaho border in Kemmerer, Wyo., are hanging on for dear life and seeking buyers in order to survive.

Whether the tsunami of bankruptcy cases actually arrives and how large the wave will be will likely depend on one great uncertainty: the timing and shape of any future relief for citizens and businesses from the economic damage from the pandemic.

The statistics for this article were from the U.S. Bankruptcy Court Pacer system, the American Bankruptcy Institute, and the Fitch Solutions pacer monitor service.