Idaho has few bankruptcies compared with rest of West

The pandemic-induced recession has begun to show its teeth for bankruptcy, but not for Idaho.

Nationally, bankruptcy cases have continued their unusual pattern of lower Chapter 13 and Chapter 7 filings counterposed with elevated Chapter 11 filings compared to prior years. The pattern has held for every week since March when compared with the same week a year before through Oct. 25, according to data from the American Bankruptcy Institute.

Focusing in on the western U.S., a recent regional analysis for the nine-state Rocky Mountain West shows that middle market businesses in Arizona, Colorado and Nevada have been hit the hardest by the pandemic recession. In comparison, Idaho, Montana, Utah and Wyoming have suffered far fewer bankruptcies. For the analysis, middle market companies were defined as those with $10 million to $500 million in annual earnings.

The analysis was authored by Resolute Commercial Services, a firm in Scottsdale, Arizona, which specialized in receivership services for in bankruptcy proceedings. As an adjunct to its business, Resolute developed an in-house regional bankruptcy index for the Rocky Mountain states which the firm now publishes online on a quarterly basis.

During the third quarter of 2020, Colorado, Arizona and Nevada accounted for for 63% of all middle market business bankruptcies in the nine-state region. By sector, businesses in the hospitality, real estate, and manufacturing industries were most impacted by bankruptcy.

“We’re just beginning to see the impact of the pandemic on business bankruptcies,” said Jerry Foster, president and founder of Resolute. “We estimate 30% to 40% of businesses in industries highly impacted by COVID-19 have gone inactive since February and many will never return. As many more companies and lenders realize the full impact of the pandemic, it could be a difficult 2021 for them.”

“In the middle market category, Idaho has had very few bankruptcies so far,” Foster told the Idaho Business Review. “In the third quarter, Idaho only accounted for 5% of the 60 Chapter 11 filings in the nine-state region, so the sample size is not enormous. Two were construction firms and one was a dairy.”

Foster also mentioned that a new form of Chapter 11 filing called Subchapter V is now in use and gaining in popularity. Subchapter V was added to the bankruptcy code on Feb. 19, just before COVID-19 cases started to spread widely in the U.S.

During Q3, more than 55% of middle market businesses in the Rocky Mountain region used Subchapter V for their Chapter 11 filings. Subchapter V allows business owners to retain equity and continue operating their companies while paying off unsecured creditors over three to five years. A time-limited cap to qualify for Subchapter V has been temporarily increased from $2.7 million in secured and unsecured debts to $7.5 million by the CARES Act. The cap will expire March 27, 2021.

“Subchapter V will enable more businesses to survive the COVID-19 pandemic and recover from bankruptcy,” Foster said.

Though the CARES Act relief measures have been credited for the unusual patterns of bankruptcy filing to date for 2020, the lower number of cases may be not significant. This is because of documented lags between the onset of economic recessions and increased numbers of bankruptcy filings. Given that many CARES Act relief provisions and programs run until the end of the calendar, this may have pushed a impending increasing in bankruptcy filings into 2021 or 2022.