Pennsylvania Chapter 11 Bankruptcies Fall

The good news is that the number of Chapter 11 business bankruptcy filings in Pennsylvania fell close to pre-recession numbers in the first quarter since dramatic rises between late 2008 through the middle of last year.  But the bad news is that a second wave of filings could come if interest rates rise without being accompanied by significant economic improvement.
Business Chapter 11 filings in New Jersey and the Eastern District of Pennsylvania have been relatively steady despite the economic downturn because most major companies choose to file in Wilmington or New York.  The recession-related increase in filings in 2009 and 2010 in the 3rd Circuit, which includes eastern Pennsylvania, New Jersey and Delaware, came largely from Wilmington.  These are the regions where many companies choose to be incorporated because of the business-friendly court structure there.
The number of Chapter 11 business filings in the 3rd Circuit combined were only 114 in second-quarter 2008.  But after Lehman Brothers went under in September that year, followed by the stock market collapse, filings went up to 408 in the third quarter, 626 in the fourth quarter and 621 in first-quarter 2009.  They remained high for the rest of 2009 and the early portion of 2010 before dropping significantly to just 213 in first-quarter 2011.
Some industry players believe that borrowers were aided by loan agreements with few financial covenants, particularly commercial real estate loans.  That means that borrowers can struggle but without defaulting.
But many filings that occurred in the most recent wave were pre-packaged arrangements with lenders that allow borrowers to reorganize.  Fewer midsize and small companies are using bankruptcy protection, choosing instead to either restructure their debt or sell the company.  The reason for that is that smaller companies cannot afford the fixed costs associated with bankruptcy, unlike larger companies.
While the decline in business filings is viewed as a good sign for the economy, many pundits are predicting there will be another spike in filings when and if interest rates rise.  Many struggling businesses have been saved by “unrealistically low” interest rates that allow them to maintain reasonable levels of cash flow despite the prolonged economic slump.
But Interest rates could affect the liquidity of many companies that could yet go bankrupt unless they find favor with their lenders.  The Federal Reserve is trying desperately to keep interest rates low but it may not be possible in the long term.

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