Recent anecdotal evidence suggests that the number of involuntary bankruptcy filings has increased over the past year. Conversations with other bankruptcy lawyers confirm that a trend may be developing. The question is, why?
It is possible, or even likely, that the increase of involuntary filings is linked to the historically low level of interest rates in the U.S. Low interest rates are causing secured lenders – the traditional drivers of distressed business restructurings and/or bankruptcies – to become complacent. Satisfied by monthly interest payments, which (because of low rates) even the most distressed borrowers can pay, lenders are not forcing their borrowers to restructure, sell or liquidate. It may be a cliché, but lenders are “kicking the can down the road.”
Vendors and suppliers, meanwhile, are watching their customers deteriorate. They realize that many of those customers have reached, or will reach, the point that they cannot be turned around or even sold, all the while running up their unsecured trade debt. At some point they will shut down and liquidate, and all of the unpaid trade debt will remain unpaid.
Secured lenders and unsecured creditors typically have an antagonistic relationship in any restructuring. Nevertheless, they have generally understood and expected that the other will act in certain ways under certain circumstances. Historically, secured lenders have stepped in before the borrower fails, albeit for their selfish reasons. Nevertheless, the action by the lender stops the bleeding and forces a resolution. Now that lenders have stopped taking action, it has fallen on unsecured creditors to step in. And since individual creditors seldom have the leverage to force the issues themselves, they act in concert and file involuntary chapter 11 cases.