Epiq, a legal services company, released the first look at the results of the new Chapter 11, Subchapter V, U.S. Bankruptcy Court filings with a total of 923 new petitions year to date since the program commenced on Feb. 19. Since then, while the market has been slow to embrace this new filing option, there has been a small but steady increase in month over month filings May to September, Epiq said.
Chapter 11 Commercial vs Subchapter V
The new statute was made possible by the bipartisan legislation known as the Small Business Reorganization Act of 2019 (SBRA) and was designed to make it easier, faster and less expensive for a small business debtor to file for bankruptcy in the U.S. However, the number of cases filed under Subchapter V represents only 20 percent of the 4,546 total new commercial Chapter 11 filings since the program commenced.
The top five industry sectors taking advantage of the benefits of Subchapter V represent approximately 40 percent of the total and include Professional & Technical Services, Health Care, Hospitality & Food Service, Construction and Retail.
“These are not the only small business sectors hit hard by the COVID-19 pandemic,” said Chris Kruse, Senior Vice President of Epiq AACER. “Even with aggressive support from the U.S. government in the form of the Coronavirus Aid, Relief and Economic Security (CARES) Act, it is still very tough out there for many in the small business community.”
“The new Subchapter V, U.S. Bankruptcy Court filing option hasn’t reached its full potential, as many small businesses have benefited from the PPP funding to provide supplemental liquidity,” said Deirdre O’Connor, Managing Director of Corporate Restructuring at Epiq. “If the financial effects of COVID outpace a company’s liquidity runway, Subchapter V may serve as an efficient viable alternative to keep employees, repay debt and most importantly retain ownership.”
Separately, Epiq had reported commercial Chapter 11 filings were up 78 percent over September 2019 with 747 new filings, which is up from 420 last year. In the first three quarters of 2020, Chapter 11 commercial filings are up 33 percent over the same period last year with a total of 5,529 filings.
“After a slower August, we see an increase Chapter 11 filings in September both month over month and year over year,” O’Connor said. “These commercial filings are primarily small businesses that do not have access to capital or stimulus. Unfortunately, those bankruptcies will continue to rise in the current economic environment. For the largest companies, opportunistic investors are providing much needed capital to supplement the lending capabilities of more constrained traditional banks. However, the most over-leveraged distressed companies could succumb to a formal restructuring due to lack of credit support and overall sector decline.”