Chapter 11 bankruptcies occur when companies file for bankruptcy in order to protect themselves from creditors and to restructure their debt into something more manageable. This process is overseen by a Federal bankruptcy judge. Usually, Chapter 11 bankruptcies are seasonal and peak in April, right before tax season. Also, bankruptcy filings are usually lowest at the end of the year. However, Chapter 11 bankruptcies spiked 63 percent in March of 2018. There were 770 Chapter 11 filings in March, the highest since April of 2011 (789 Chapter 11 filings) when the country was in the throws of the Great Recession.

When a company files for Chapter 11 bankruptcy, the debt is consolidated and usually significantly reduced. Often, part of ownership of the company is given to the creditors and taken away from the pre-bankruptcy shareholders, who quite often lose everything. Further, unsecured creditors usually do not get paid anything in the bankruptcy. The only creditors that are usually made whole are secured creditors. The hope is that by reducing the debts the company can emerge successfully from Chapter 11 bankruptcy protection and still be a viable business.

One of the causes of the spike in Chapter 11 bankruptcies is what is termed as the Brick and Mortar Retail Meltdown. This phenomenon has been occurring since 2016 where there have been large bankruptcies of non-internet retailers. The bankruptcies have usually started out as Chapter 11’s but many of the them could not overcome their problems and emerge from bankruptcy protection successfully, requiring liquidation. One recent famous example of this is the iconic brick and mortar retailer, Sears.

Despite the economy doing quite well in most sections, the other potential cause of the spike in Chapter 11 bankruptcies is caused by the Federal Reserve. Because the economy has been churning on at a fairly good clip, the Fed has been concerned about inflation, thus it has been increasing interest rates. With higher interest rates, companies that are already doing poorly have a harder time restructuring their debt and at higher costs. When this happens more Chapter 11 filings follow.

The team at Morgan & Morgan is there for you to help you through your financial issues and answer any bankruptcy questions you may have. You can contact us at (706) 752-7089.

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