Bankruptcy protection is option for those hurt by pandemic, but lawyers say filings haven’t become flood … yet

By Brett Johnson
New Jersey | Jun 16, 2020 at 9:44 am
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Proof positive of the pandemic’s economic impact is the fact that there’s one practice area that’s busier than all the others at Sills Cummis & Gross P.C.: bankruptcies.

It’s no surprise, given that U.S. courts scored a record 560 new corporate Chapter 11 bankruptcy cases during the month of April, and then had another uptick in May, according to legal services firm Epiq.

During the spread of COVID-19 and the consequent business slowdown, some private entities suffered a financial wound that only restructuring through bankruptcy filings can fix — and the numbers point to that.

But, for local attorneys such as Max Crane, a managing partner at the Newark-based Sills Cummis & Gross, conversations about bankruptcy protection … are mostly still just conversations.

So far, New Jersey hasn’t had a massive spike of businesses filing for bankruptcy that weren’t already considering doing so before the pandemic. Crane said businesses have been eager to hear what their options are, but also want to see if there might be light at the end of the tunnel.

Until businesses come out of the other end of the pandemic situation, there’s going to be a risk of a wave of bankruptcies, even if it hasn’t hit yet.

“At some point, it becomes a question of how long these businesses can continue without revenue coming in,” he said.

When it comes to individuals seeking bankruptcy protection, there’s no question: Things so far are much slower than anticipated.

Courtesy photos
Lee M. Perlman.

Lee M. Perlman, a Cherry Hill-based attorney who handles consumer bankruptcy filings, said this area of bankruptcy filings in New Jersey and other parts of the country is about half as active as it was before the pandemic swept the nation.

“Filings aren’t as busy as I would expect right now,” he said. “There’s still some uncertainty. People don’t know what employers are going to do.”

Perlman said the nation’s unemployment woes are manifesting for now in the amount of borrowers of federally-backed mortgage loans requesting forbearance due to COVID-19 hardships.

Under the federal Coronavirus Aid, Relief, and Economic Security Act, or CARES for short, federal bankruptcy filings have been subject to some temporary changes. One of those is that someone with a preexisting Chapter 13 bankruptcy plan can ask for their repayment period to be extended from five years to seven years.

“So, for now, what we’re seeing is a lot of modification of existing bankruptcy payments,” Perlman said. “People are going back to courts to file hardship motions to reflect what’s going on with COVID-19.”

When it comes to new bankruptcy filers, people are mostly content to sit tight.

A few months into the economies of states reopening — once it’s clearer what an individual’s financial picture will be outside of a crisis moment — Perlman expects there could be a sudden surge of bankruptcies.

“At that point, people will be making these decisions,” he said. “And I’m anticipating to be as busy or potentially more than prior to the crisis.”

Businesses’ bankruptcy cases could share a similar fate, given the speculation about whether the sunset of Paycheck Protection Program loans will spur bankruptcies. And it is true that those applying for and accepting those federal dollars have been prohibited from being in active bankruptcies, Perlman said.

Company leaders come to attorneys like Perlman in times of distress, when they see bankruptcy as the only option. But even he’ll say that, especially with these relief funds, most businesses are probably best served right now by trying to stay afloat without it.

“While everyone’s case is different, I think it makes sense to stay open and see if you can operate, for example, at 50% capacity as a restaurant and still pay all your bills and other obligations before deciding anything,” he said.

What many anticipate is that it’s businesses in particular industries, such as bars and restaurants, that might be on the verge of needing to file bankruptcy en masse.

Based on early conversations in the bankruptcy practice at Sills Cummis & Gross, Crane suspects that to be the case.

“It’s really a tale of two cities, because most of the software companies, the medical device companies and the manufacturers of specialized PPE equipment are doing fine,” Crane said. “Travel, retail, hospitality and leisure — those that thrive on highly concentrated, customer-specific, in-person interaction — this virus put all of them behind the eight ball.”

Crane said his law group has one of the country’s most active health care bankruptcy practices. The pandemic has not been kind to the bottom line of hospitals. Bankruptcies are often the only option for a troubled hospital that needs restructuring, but it’s still a last resort.

Joseph Lemkin.

In other words, Crane said, it’s likely that there’s going to be bankruptcy work in the health care and hospital space in the years to come.

New Jersey law firm Stark & Stark has been counsel to landlords and trade creditors in some of the recent big-name retail Chapter 11 bankruptcy cases, such as Sports Authority and Pier 1 Imports Inc.

Joseph Lemkin, a partner at the firm, said a lot of the latest companies to make headlines, including JCPenney’s bankruptcy, have a commonality: It’s often those that were already weighing bankruptcy options before the pandemic.

“Some of these companies were going to make efforts to restructure even prior to this,” he said. “Now, they’re pivoting to liquidation.”

Even if these bankruptcies affect the Garden State, these companies haven’t filed for bankruptcy protection in New Jersey, but often in lower-tax jurisdictions where many large corporations are incorporated, such as Delaware.

As to whether the smaller New Jersey-based companies in hard-hit industries will soon follow, Lemkin, like others, says a lot remains to be seen.

“For now, those mom-and-pop shops are biding their time,” he said. “They’ve been allowed to, because their landlords perhaps haven’t been as aggressive. And that’s one of the big reasons you file bankruptcy, you’re behind on your rent. Things might change once evictions start again.”

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