Bankruptcies Bounce Back

Bankruptcies Bounce Back (Courtesy of the Jacksonville Business Journal) — Catch any bankruptcy attorney in Jacksonville these days when they’re not working — if you can — and they’ll tell you business is booming. 

“I’m definitely busier than I’ve been in a few years,” said bankruptcy attorney Bryan Mickler of the Jacksonville firm Mickler & Mickler. 

That’s a far cry from the past several years, years that saw the number of attorneys practicing bankruptcy shrink. 

“We took our staff down to a skeleton staff,” Mickler remembered. “A lot of people kind of moved over (to other fields of law) over the years.” 

Now, he’s hiring to handle the increased workload.

“I just can’t keep up with where I am right now,” he said. 

It’s an interesting time to be in the business of helping businesses going through challenges.

While fears over where the economy will go over the rest of the year have moderated — with economists at the Federal Reserve, Bank of America, Goldman Sachs and elsewhere sounding notes of optimism — the tightening seen earlier this year has had an impact, with inflation and soaring interests leading to the largest number of bankruptcies by public and large private companies in over a decade, according to S&P Global Market Intelligence.

Smaller companies have not been hit as hard, but the crunch has impacted them, too, with the number of bankruptcies filed in Jacksonville and across the state on the upswing so far this year.

Apart from a brief jump in 2019, bankruptcies in Florida have been steadily declining since a peak in 2010, when 66,618 cases were filed in the state. 

Last year, 13,877 cases were filed across Florida. Up through July of this year, the state has seen 12,818 filings — almost 90% of what all of 2022 saw.

In the Jacksonville division, 2,353 cases have been filed — 88% of the 2,676 cases filed on the First Coast last year.

As of July, the number of bankruptcies filed in Jacksonville was up 50% compared to the same period last year — the first substantial jump in more than a decade.

A decade ago, bankruptcies were much higher, with 3,914 in Duval County reported in the 12 months that ended with June 2013. Mickler said at one point during the Great Recession, the federal courthouse in Jacksonville saw close to 15,000 cases from filings across the region.

That decrease over time led to a depletion of bankruptcy legal talent in Northeast Florida, which is leading some firms now to try and staff up for the influx of new work.

“The numbers (of bankruptcy attorneys) have definitely declined,” Mickler said. “I think this year, you’re going to see the first year of the increase.”

PLANNING AHEAD

For companies who have reached the point that bankruptcy is a valid — or perhaps the only — option, things can get tricky: Having your business fail isn’t something for which business owners typically plan.

“I would say, on the surface, it (bankruptcy) sounds like this really obvious choice to do,” said Jacki Stewart of Indigo Float, a Jacksonville wellness business that recently went into bankruptcy. “Then once you’re in it, you kind of realize how many rules there are, and how many complexities there are. It’s very, very, very complicated.” 

Nina LaFleur, of the LaFleur Law Firm in St. Augustine, said the process can be simpler than it looks for a lot of people.

“Most people have the perception that filing is difficult and not an option when, in fact, it is a very straight-forward and easily available option that allows one to wipe out most unsecured debt while keeping most of their assets,” she said. “With an experienced lawyer, the entire process can be completed in about 90 days.” 

In its most basic element, a Chapter 7 filings is when the bankruptcy trustee sells the debtor’s nonexempt assets to pay creditors in accordance with the law. Part of the debtor’s property could be subject to liens and mortgages that pledge that property to creditors. The debtor can keep what’s classified as exempt property, but the rest is open to liquidation by the trustee.

Chapter 11 typically provides for reorganization of a corporation or partnership in order to keep a business alive and get creditors paid. If filed as a voluntary petition, the filer also has to provide the court with the entity’s schedules of assets and liabilities, a schedule of current income and expenditures, a schedule of executory contracts and unexpired leases, and a statement of financial affairs.

The debtor remains in possession and control of its assets until the court approves its plan of reorganization, the case is dismissed, converted to a Chapter 7 case, or a Chapter 11 trustee is appointed. Creditors whose contractual rights are modified by the plan, who who may be paid less than the full value of their claims, vote on the plan. The court takes the vote into account when deciding whether to confirm the reorganization plan.

Chapter 13 is for addressing debts of a person with regular income. It allows the debtor to keep their property and pay down debts over a number of years, usually three to five. This chapter of the bankruptcy code is notable for helping people save their homes from foreclosure.  

“It’s very expensive to go through bankruptcy, which feels a bit counterintuitive,” said Stewart of Indigo Float. “Because, it’s typically people who are in some financial distress. So the irony there that it’s very expensive to go through bankruptcy is not lost on me.”

CONTAINING THE FALLOUT

It can also be a tricky situation for the vendors, customers, suppliers and other businesses that interact with a firm going through bankruptcy. 

“Whenever you do business with somebody, probably providing them goods or services on credit, you’re basically advancing unsecured credit to whoever your counterpart is,” said Rudy Cerone, a bankruptcy attorney with McGlinchey Stafford. “The only way you can really protect yourself in advance is to get a guarantee or get some kind of collateral.” 

If the company files for Chapter 11, some creditors can attempt to receive designation as a critical vendor, which means they will continue to receive timely payments and other special protections, as along as they provide a good or service that company can’t live without. 

For many businesses, though, the only way to make sure not to become collateral damage is to be vigilant. 

The transportation sector, for example, has seen several high-profile bankruptcies recently, including Surge Transportation in Jacksonville and Yellow in Nashville. 

Staying on guard is a must, said Rob Hooper, CEO of Atlantic Logistics and a trained economist.

“Atlantic carefully monitors all our customers’ credit scores with continuous monitoring using Moody’s Analytics, and for larger customers, also Dun & Bradstreet,” Hooper said. “This is to make sure that one of our customers do not go bankrupt and put us in a tight position.”

LOOKING AHEAD

So what’s on the horizon?

For many companies, a potentially tough time — particularly if they emerged wounded from the pandemic

Higher commodity prices, higher wages, higher rents and more have combined to make things challenging, Regions Financial Corp. Chief Investment Officer Alan McKnight said during a meeting of the American Bankruptcy Institute on Amelia Island.

“You think about the wage front, where it’s led to is that companies are having to pay more, but they haven’t necessarily been able to pass those increases on to all of their customers,” McKnight said. “So, you pay more for people to come in, you pay more on the commodity side. Ultimately, the data that you get is lower margins, more challenging margins.”

Operating margins are at their lowest level since 2015, he said.

Conventional wisdom among economists is stimulus dollars and easy money allowed businesses that would’ve gone into bankruptcy earlier instead limp along until this year, when inflation and interest rates made that no longer tenable.

“Over the past year, interest rates have gone up significantly, and I think that may be a big factor in the uptick in bankruptcies,” said Sean Snaith, director of the University of Central Florida’s Institute for Economic Forecasting. “People that, using debt, or in debt artfully, or financing business, having to refinance at higher rates that maybe are not sustainable.” 

But it’s not all doom and gloom.

While filings are elevated, they’re still low by historic standards, Snaith notes.

While industries like commercial real estate investing — which is particularly hit hard by interest rate changes — are seeing trouble, it doesn’t mean there will be contagion. 

“I think what’s happening is there’s pockets of the economy that have trouble, certain sectors in certain geographic places, which are sort of like the (presidential) primaries,” said Cerone, the McGlinchey Stafford attorney. “You got the national polls, and then you got individual state polls, and those two sometimes don’t match. Of course, there’s (commercial) real estate, it’s going to have a real problem. But that doesn’t mean it’s going to bring it down.”  

Photo courtesy of Oak Tree Law