Bankruptcy Matters: The New Pandemic Wave Is Coming – Insolvency/Bankruptcy/Restructuring

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Given the ongoing economic upheaval due to the COVID-19 pandemic, you might reasonably assume that the number of personal and business bankruptcies would have skyrocketed. But that is not the experience of three JAMS neutrals who operate in this field: Ann Marshall, Patrick McManemin and Charles Clevert. In fact, quite the opposite happened. “Bankruptcy filings in the Pacific Northwest were down in 2019, and that trend has continued through 2020,” Marshall says. “And then, to most people’s surprise, it continued into 2021. Every month, year over year, bankruptcy filings went down.”

Marshall, who has experience in consumer bankruptcy cases, speculates that government intervention explains this trend, for example, moratoriums on foreclosures and other types of government assistance. McManemin, whose area of ​​expertise is corporate bankruptcy, offers another interesting theory: “While cases can be filed, they don’t move as fast. Before the pandemic, these records would have been almost immediately out of the box. But now they might not take off for 60 or even 90 days.” The reason for this, McManemin suggests, is twofold: First, the courts were completely closed for a while during the pandemic, creating a huge backlog. And second, , because it is often advantageous for a party to prolong the bankruptcy proceedings, it is not uncommon for this party to use blocking tactics.” In an ordinary situation, the judges see this tactic, and they can overcome it fast enough. But in the COVID context, it’s become nearly impossible to get an audience unless everyone is willing to do it on Zoom. This made it very difficult to move the case forward unless everyone involved in the case wanted it to move. »

The three neutrals predict that as the effects of COVID-19 abate, the number of bankruptcy cases will increase. “I expect there will be an increase in the number of filings and the number of cases where creditors are going to sue plaintiffs,” Clevert says. But their opinions on what could precipitate this increase vary. “But most people seem to think foreclosure moratoriums will start to expire. And when that happens, foreclosures will increase, followed by bankruptcies,” Marshall said. Clevert, whose cases during the pandemic have so far been mostly linked to credit issues, has a slightly different hypothesis: “When people go back to work and they have income, creditors are more likely to continue,” he said. When this happens, he explains, “individuals are more likely to file petitions in bankruptcy court or in state court for some type of debt relief.” As for McManemin, he thinks the triggering event will be when the government turns off its tap – for individuals and businesses. On an individual level, “people won’t have that much money to spend,” McManemin says. This, in turn, will lead to a contraction in demand, which will have an effect on the businesses where these people trade. At the same time, these same companies will no doubt have already spent all of the Paycheck Protection Program funds they received from the government, putting them further in the hole. All of this, plus the inevitable rise in interest rates, means “there’s going to be a margin of borrowers who won’t have the cash flow they had before, and they’re going to be in big trouble.” , says McManemin. .

Meanwhile, for the bankruptcy files they already have, the three neutrals have had to adapt to using virtual procedures using platforms like Zoom. “I love virtual procedures,” says Clevert. “I think they lend themselves to greater participation from entities and executives who might not otherwise be able to participate in the process. And that helps eliminate the delays you would have if someone was not present due to travel restrictions.” Virtual proceedings can be particularly advantageous for debtors. “Business management practically means that debtors do not need to take time off work at what can be a very critical time in terms of employment. It also reduces the legal costs they will have to incur. ” Perhaps more importantly, “it broadens debtors’ access to experienced lawyers outside their home region”. Marshall also sees virtual procedures in a positive light. “I think mediation is effective both in terms of time and cost. It allows you to more effectively resolve some thorny issues such as detailed escrow account disputes when the debtor and creditor can approach and discuss the dispute. during mediation. For his part, McManemin still prefers in-person mediation, but agrees that the cost and convenience of virtual proceedings make them an attractive option for clients. In any case, the three neutrals believe that virtual procedures are here to stay. “I think it’s gotten to the point where people feel a lot more comfortable with the process, and I don’t think it’s going to go away,” Clevert says. Clevert also predicts increased use of hybrid proceedings, “where some people appear in person and others appear virtually.”

“It’s hard to predict what will happen with filings in 2022,” Marshall says. Clevert foresees increased efforts to bring class action lawsuits, for example against creditors who may have sued debtors unethically or unlawfully. This, he says, could help debtors who would otherwise struggle to get legal representation. And McManemin theorizes that lawyers will get quite creative in their attempts to deal with COVID-19-related losses with insurance companies.

What seems certain is that, as painful as the pandemic has been, certain effects of the pandemic – things like strengthened courts and the increased use of virtual proceedings – provide opportunities to expand the use of mediation to resolve bankruptcy disputes. For example, Marshall predicts increased use of mediation for cases involving smaller dollar amounts. She explains, “Normally in bankruptcy mediation, if it’s in person, the bank has to send someone. You have flights. You have hotels. You have a waste of time. just wouldn’t happen. But Zoom is opening the door for that to happen more. Marshall also suggests that mediation could significantly help courts with high caseloads if bankruptcy filings increase significantly next year. Finally, parties on both sides of a bankruptcy filing might appreciate the traditional benefits associated with mediation, such as confidentiality, flexibility, and the ability to design a solution that works for all parties. Ultimately, says McManemin, “the question that concerns me is, how are the bankruptcy judges going to handle things? Will they favor mediation as the first alternative? Or will they look for other ways to solve these problems? »

The content of this article is intended to provide a general guide on the subject. Specialist advice should be sought regarding your particular situation.

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