Chapter 11s Rise 62% in 2008

Yesterday, I posted about the increase in total bankruptcy petitions. Today, I want to focus on one particular subset of that figure and that is the number of chapter 11 petitions, which also are on the rise. Again, Automated Access to Court Electronic Records (AACER) has provided filing figures through the end of December 2008. According to these data, there were just over 10,000 chapter 11 cases in 2008 as compared to only 6,200 in 2007 for an increase of 61.5%. In 2008, chapter 11 petitions increased faster than the total number of bankruptcy cases, which rose 32%.

The headlines in the business press have recently reported on large bankruptcies like Circuit City and the Tribune Company. The businesses in those cases certainly employ thousands of people, owe investors millions of dollars, and rightfully deserve the attention they garner. These large bankruptcies represent only a tiny fraction, maybe no more than 2% of the chapter 11 cases that were filed in 2008. The typical chapter 11 is a much smaller business or is often the bankruptcy of a small business owner. Indeed, individuals filed 19.5% of all the chapter 11 cases in 2008. Many of these chapter 11s represent the lost dream of a small business owner and the jobs that went with that dream.

Comments

[David Fuller]

The "opportunities" in the real estate market seem to have created some unlikely chapter 11s. I have seen a few case - a statistically useful term I know - in which the debtor busted the debt limits in 109(e) and was forced from a chapter 13 to a chapter 11.

In each case, the debtor had a decent wage earning job but had purchased a few houses for rentals, gotten lots of credit cards, and then paid the credit cards off with 2nds and 3rds on the rental properties.

When the real estate market crashed and the credit market seized up, they were left with no equity, lots of secured debt, and lots of unsecured debt, making them chapter 11 debtors. Although they could have arguably filed a chapter 7 either because their secured debt knocked out the presumption or you could have argued "not primarily consumer debts," they had a primary residence that they needed to pull out of foreclosure. And thus, Ma and Pa Kettle became chapter 11 debtors along with Lehman Brothers.

[Patches]

What about consumer 11s? Which is sort of (not really but sort of) what David is talking about. I know, I know, its expensive but in theory can't any 7 be an 11 despite the debt limits? And 13s are so darn complicated when you mix biz and personal, the plans are hard to confirm and the nifty “fixed fee” apps don’t apply to Biz 13s.

Biz owes the debt but the debtor personally guaranteed the debt plus the debtors’ home is on the line. If you want to continue to operate and the biz has assets (not over the limit) assets but assets, you don't want a 7 right? If you do a 13 for the Biz and personal, the plan payments are coming out of the same pot anyway and you pay twice the attorneys fees, maybe triple. Consumer 11s seem logical in certain circumstances maybe with building leases, vendors, employees, 941s, because the debtors are pickled under the 109 limits. Correct me if I am wrong but 109 is just a one way street, right? It doesn’t prevent any entity or debtor from converting to an 11 because they are under.

[Bob Lawless]

I think--but do not have any hard data to prove it--that there are very few true "consumer 11s." As I wrote in my post, about 1 in 5 chapter 11s were filed by individuals, but I suspect many of these individuals are there because of business related problems. David Fuller's narrative of real estate investors ending up in chapter 11 also explains many of these individuals chapter 11s.