As the U.S. economy is in its worst recession in decades, with the COVID-19 pandemic depressing consumer spending and business investments, attorneys and experts expected business bankruptcies to skyrocket.
Instead, filings nationwide have gone down.
“The boom everyone thought was going to happen just hasn’t materialized,” said Dick Davis, bankruptcy attorney in San Antonio.
The low level of bankruptcies cuts against modern economic patterns and has been one of the most perplexing trends from a pandemic era that has seen many restaurants, retailers, and other small businesses close shop.
Ed Flynn, a consultant to the American Bankruptcy Institute, said he’s uncertain what the future holds.
“I’m looking at debt figures, unemployment, the GDP numbers and, well, it’s just hard to come up with a coherent explanation of what I’m seeing,” he said. “I’m trying to reconcile the numbers, but I’m just more confused.”
Nationwide, business bankruptcies have fallen for all but the largest corporations. While the downward trend in San Antonio has been less dramatic – the city and the bankruptcy district here have never been a hotspot for bankruptcies – the lack of filings is no less surprising.
Ron Smeberg, a San Antonio bankruptcy attorney, said business is “dirt slow.” Far from the many large-scale restructuring bankruptcies he’s used to juggling, he finds himself only with a few small-scale liquidation bankruptcies and an old case to process.
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The Western District of Texas’ bankruptcy court, which covers San Antonio, makes statistics available online that show 2020 filings in the city declining to their 2018 levels.
In the district’s San Antonio office, Chapter 7 business bankruptcies – the most common for small businesses, a kind of scorched-earth legal maneuver that involves erasing debt through surrendering one’s assets – went down by nearly a quarter from 2019 to 2020. Chapter 11 filings, which allow a business to restructure and continue operating, had an even more dramatic decline, dropping by about a third.
Smeberg said he and other lawyers working on the ground believe these numbers could rise, and quickly.
“We believe there’s going to be a tidal wave,” he said. “We just don’t know how big that reckoning will be.”
Since the start of 2021, the roughly two dozen businesses that have filed include an equipment rental company, a construction contractor, and the real estate group for a retail plaza, where many stores were closed for extended periods.
Part of the reason for the decline may be attributable to the fact that bankruptcy is a “remedy of last resort,” said Raymond Battaglia, a bankruptcy attorney in San Antonio. “I would generally counsel my clients that they need a reason to file bankruptcy. It’s time-consuming, expensive, and the litigation is out of your control.”
Or more simply: “Don’t file if you don’t have to.”
Many attorneys and experts said smaller and midsize firms have been propped up by the CARES Act, which has furnished loans through the Paycheck Protection Program and other avenues.
Fueling the optimism of some small-business owners, President Joe Biden signed legislation Thursday that would pump $1.9 trillion into the economy, bringing the total amount of pandemic-related stimulus to $5.6 trillion.
Another reason may come from the sheer difficulty that has marked the process under the pandemic.
In San Antonio, bankruptcies have been stalled by the fact that County Judge Nelson Wolff for much of the pandemic prohibited foreclosure auctions, which sell off the assets of businesses that declare bankruptcy.
“There’s no reason to run if they can’t chase you,” Battaglia said.
An executive order from Wolff this month rescinds all previous pandemic-related orders, including those prohibiting the auctions. But a spokesman for the county manager’s office, Tom Peine, said Wolff will be conferring with public health officials to consider whether to reinstate a prohibition.
As the COVID-19 vaccine becomes more widely available, relieving much of the pandemic pressure and possibly opening the door for a rebound in consumer spending, it remains to be seen whether a bankruptcy bulge will come.
But if it does, there may be yet another reason to hold off on declaring bankruptcy as long as you can, Battaglia said.
“There’s a strong possibility that the guy to the left and right of you will go out of business,” Battaglia said. “You want to be the last one standing.”