August 26, 2005--Upcoming changes to the bankruptcy code are expected to create a surge in the number of small businesses filing for bankruptcy over the next few months, lawyers and insolvency experts say.
Uncertainty over the Bankruptcy Abuse Prevention and Consumer Protection Act, which goes into effect October 17, has already prompted record levels in consumer bankruptcy filings. By contrast, business filings have been in a steady decline for years, though many anticipate a sharp rise closer to the October deadline.
"That's the magic date we're all watching," said Diane Vuocolo, a bankruptcy lawyer at Duane Morris LLP in Philadelphia, PA. Vuocolo said she'd be "very surprised" if numbers didn't start climbing soon.
In the last three months alone, total bankruptcy filings across the country soared by 66,000 to 467,333, an 11%increase over the same period last year, according to figures released Wednesday by the Administrative Office of the U.S. Courts. That increase, the highest on record, was fueled primarily by individuals rushing to file under Chapter 7 before tougher rules kick in, said Nathalie Martin of the American Bankruptcy Institute.
While total filings remained steady at 1.64 million over the 12-month period ending June 20, 2005, the number of businesses filings dropped by 9.3 % to just 32,406.
The difference this summer is a stronger economy, says Vuocolo.
"Money's cheap right now, so troubled businesses are more able to get refinancing" rather than file for Chapter 11, she said.
Another reason businesses may be slower to respond is that most of the changes, which were signed into law on April 20, target consumer bankruptcy. Martin added, "That's why the Chapter 7 numbers are so high."
Still, she fully expects troubled businesses to follow suit. "We're already seeing signs of that now," she said, citing ABI figures showing a 6% rise in business filings between April and June.
Marsha Houston, a bankruptcy lawyer at Katten Muchin Rosenman LLP, said the new provisions covering small businesses, though few, are "far more onerous." They include tighter limits on filing reorganization plans and assuming or rejecting leases, along with possible restrictions on retaining key personnel. That should scare troubled businesses into filing under the old code before it's too late, she said.