Commercial bankruptcy filings headed upward last month, leaving experts bracing for more fallout from the struggling economy in the second half of 2011.
In July, 1,217 businesses and individuals sought Chapter 11 protection, a 24.2% increase over June, according to data released Tuesday by Automated Access To Court Electronic Records, or AACER. The July 2010 numbers nearly matched July 2009's count, when 1,283 businesses and individuals filed Chapter 11 petitions.
In addition, last month's total commercial filings tallied 7,256, an uptick from June's 7,141 filings.
While those figures include heavyweights like real-estate investment trust Innkeepers USA Trust and Nexity Financial Corp., the holding company for Nexity Bank, bankruptcy attorneys acknowledged that they haven't seen the influx of large bankruptcy filings that economic indicators had suggested might be forthcoming.
"It's still not at the levels that people would expect," said Norman Kinel, an attorney with Lowenstein Sandler. "I think we're seeing more of the Main Street-type filings in recent months than the larger filings that many of us had anticipated."
Recent bankruptcy-filing statistics are being driven by small and mid-sized companies, rather than by a steady stream of massive companies, Kinel said.
"Those types of companies seem to be feeling the economic pinch more in recent months," he said, noting that they didn't have access to some of the government assistance that helped some larger companies avert bankruptcy.
Powered by these smaller filings, and perhaps some larger cases looming on the horizon, bankruptcies are expected to increase as 2011 approaches, according to both Kinel and Jack Williams, a bankruptcy professor at Georgia State University College of Law.
Williams says many businesses have only been able to avoid bankruptcy so far because they're seeing more leniency from their lenders, who are also struggling in today's economic conditions.
"The banks and financial institutions are not letting the hammer fall when in other environments they may have done so," he said.
Even trade creditors have been willing to forego payments for longer periods of time in order to avoid losing a customer. If they can't be sure whether a company is going to reorganize or liquidate in bankruptcy, creditors are often content to accept the status quo.
"Everyone is going to continue collectively to hold their breath trying to determine which way this is going to shake out," he said.
But once the economy begins to tilt one way or another, favoring either reorganizations or liquidations, more creditors will begin to put pressure on struggling businesses to seek shelter under the Bankruptcy Code, Williams said. Specifically, he's predicting more filings by retailers in the fourth quarter of 2010 or early days of 2011.
Williams also expects to see an increase in filings by businesses in the Gulf Coast region that have seen their revenue decimated by the BP oil spill. Those intertwined with the tourism and fishing industries have been especially hard hit by the tainted waters.
"Their businesses were fragile to begin with and had very tight margins and were very competitive," Williams said.
It often takes several months for natural or man-made disasters to translate into bankruptcy filings, as victims hold out hope for a recovery.
"I think that many of them have been trying to weather the storm down there," Williams said. "I don't think it's been as successful as they hoped and dreamed."
