Insolvency Cases Plummet, But Firms Expect Upswing
By Beth Bar
New York Law Journal
April 26, 2007
Bankruptcy filings plummeted last year, the first full year after the a major revision in the federal bankruptcy code.Filings in the federal bankruptcy courts dropped 70 percent nationally to their lowest level since 1988, according to data released earlier this month by the Administrative Office of the U.S. Courts.
But local legal experts say the number of bankruptcy filings could inch up in future years, particularly if the economy deteriorates.
"The overwhelming causes of bankruptcy still exist," said David B. Shaev, a Manhattan bankruptcy attorney, referring to medical problems, unemployment, divorce and separation.
Moreover, at least some firms are recruiting bankruptcy attorneys in anticipation of a future downturn.
The courts reported that 617,660 bankruptcies were filed in 2006, compared with a record 2.1 million in 2005. Non-business filings declined by 71 percent and business filings by half.
In New York, filings fell by close to 79 percent in the Southern District, 76 percent in the Eastern District, almost 64 percent in the Northern District and 68 percent in the Western District. Business filings dropped by half to almost 20,000 in 2006, and non-business filings fell 71 percent from 2005.
Non-business filings in the four New York districts were down 63.7 percent, compared to a fall of 25.3 percent in business filings.
The Bankruptcy Abuse Prevention and Consumer Protection Act went into effect on Oct. 17, 2005. The law makes it more difficult for consumers and small businesses to secure protection from their creditors.
Samuel Gerdano, the executive director of the American Bankruptcy Institute, said in a statement that the drop this year was "almost entirely due to" the changes made to the bankruptcy laws.
In an interview, Mr. Gerdano said the act created additional requirements for businesses and non-businesses interested in filing for bankruptcy, but said individual debtors have been hit hardest by the act's requirements.
Under the law, potential individual debtors whose net current monthly income exceeds their state's median income must take a "means test" to demonstrate that they qualify to file for bankruptcy under Chapter 7.
Mr. Shaev said some debtors shy away from filing for bankruptcy because they worry that they will not qualify under the means test.
He also said the costs and attorney's fees have generally doubled as a result of the law, making it more difficult for those who are already strapped for cash to afford to file.
Attorneys who specialize in corporate bankruptcies and restructurings said fewer companies filed for bankruptcy protection last year because the economy has been strong and because it has been easy for businesses to borrow money.
"Companies have been able to find refinancing solutions and have therefore avoided having to seek protection in court proceedings," said Marcia L. Goldstein, co-chair of the business finance and restructuring department at Weil Gotshal & Manges.
Martin J. Bienenstock, the other co-chair of Weil Gotshal's business finance and restructuring department, also said filings are down because the economy has been stable.
"You haven't seen any unexpected negative activity," he said. "There has been no 9-11, no shocks to the system."
Despite the sharp decrease in the number of filings, some firms are hiring more bankruptcy lawyers in anticipation of the economy taking a downward turn in the near future. A number of firms have recently made high-profile hires.
Bankruptcy pioneer Harvey R. Miller returned in March to Weil Gotshal after spending five years at a boutique investment bank (NYLJ, March 8). But later in the month the firm lost four partners to Cadwalader Wickersham & Taft (NYLJ, March 13).
John J. Rapisardi, one of the attorneys recently hired by Cadwalader, said the firm has a "robust" practice. It is serving as debtors' counsel in the pending Northwest Airlines Chapter 11 cases and is representing Enron Corporation and its affiliates as special bankruptcy counsel.
Mr. Rapisardi, however, said that some firms are beefing up their practice because they believe that companies are "postponing the inevitable" by taking out loans, and that eventually these companies will have to file for bankruptcy.
"At some point in time, companies are going to have to deal with their problems, and the correction will occur, but it is hard to say when that will happen," Mr. Rapisardi said.
Other firms are promoting from within. J. Gregory Milmoe, co-head of Skadden Arps Slate Meagher & Flom's corporate restructuring practice, said Skadden recently promoted three associates to partner-level positions in his practice.
Mr. Milmoe said his firm, whose clients include Kmart, Polaroid and US Airways, has also been "actively recruiting" new hires in anticipation of a surge in bankruptcies.
- Beth Bar can be reached at bbar@alm.com
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