The Future of Bankruptcy Work for Lawyers

As expected, as the number of consumers filing bankruptcy has continued to decrease, the revenue of the consumer bankruptcy debtor and creditor bar has been hit hard. Over the past several years billable hours of business bankruptcy (including insolvency, workout or reorganization) lawyers have been dropping and many mid-level partners at large firms are looking for work in related or unrelated specialties. 

We would expect consumer bankruptcy work to increase when:

1. Filing has a better chance of discharging some or all student loan debt;
2. Filing has a better chance of helping consumers modify the terms of their first mortgages;
3. Filing has a better chance of helping consumers modify the terms of their car loans; and/or
4. Credit card debt and/or defaults increase.

The future is harder to call for the business bankruptcy field. Everyone expects the number of business failures and loan defaults to increase when interest rates tick up and those businesses that are surviving only because of the low rates cannot service their debts or find alternative financing.  Even though the economy had not been vibrant, with the exception of specific industries such as coal or oil defaults are low.

The challenge is to predict to what extent law work in this area is down because of structural and legislative changes.  For example, the shift from traditional financial institution lenders to “Loan to Own” lenders has reduced the amount of law work related to default and/or restructure on both the debtor and the creditor side. Partly related to that change, the shift from chapter 11 reorganizations to “chapter” 363 sales has significantly reduced bankruptcy court work. One of the factors in the shift to 363 sales rather than true reorganizations was the legislative changes to Article 9 in all fifty states. When the ALI –ULI drafting committee made it much easier to take and enforce in bankruptcy court a security interest in just about every conceivable type of asset they reduced the reorganization leverage.

What percentage of the drop off in work involving defaults, workouts and restructure is related to these factors will determine to what extent the work will grow when defaults rise.

Comments

[Bob Lawless]

On the consumer side, David, I have written a lot about this on the blog. Look under the "Bankruptcy Data" category. There are lots of theories about the ups and downs of consumer filing rate, but it consistently follows the amount of outstanding consumer debt. Full stop. It also does it unintuitive ways, namely that expansions of consumer credit in the short term drive down filing rates as consumers can use credit to ease a household liquidity crunch. In the long run, as consumer debt piles up on household balance sheets, the bankruptcy filing rate will have to go up.

I do agree that making student loans dischargeable likely would result in a spike in the filing rate. Household balance sheets have been shedding dischargeable debt, and the biggest growth in consumer debt is in nondischargeable student loan debt.

[Robert White]

Prediction -

There will be a slight bump in future consumer bankruptcy filings from repeat filers who filed after the 2007 financial crisis, being that it is now eight years later and those filers can file once again. (Like baby boomers having babies.)

The theory being that the cultural shock of filing bankruptcy lessens each time you file.

[Knute Rife]

You know that interest rate uptick? Here it comes: http://www.nytimes.com/2015/12/03/business/economy/janet-yellen-federal-reserve-interest-rates.html?_r=0

[John]

We just went through a time of very high filings. Only natural that it should ebb and flow. As we close out the year, filings are definitely on their way back up.