This year, bankruptcy files have decreased nationally, with the economic gutshot from the Covid-19 pandemic becoming a puzzling pattern. This year, there have been just 18,381 bankruptcy filings in the Central District of California, covering most of Los Angeles, Ventura, and Santa Barbara counties. This is almost half of the 38,000 filings made last year. Why are this year’s bankruptcies down, not up?

Filing for Bankruptcy by Big Corporations Only

One explanation is that it is just the eighth month of the calendar year that we are in. Today, it’s hard to imagine that there will be another 20,000 bankruptcies lodged in California’s Central Region by the end of the year. Even since the spring, the press has been full of significant corporations applying for bankruptcy proceedings. 

A significant cause is a pandemic. I can see that I’m not the only one traveling a whole lot less from the uncharacteristically deserted roads across Southern California, thereby wasting far less time and resources on the pump, not to mention lesser time (no time, really) eating out, heading to the cinema, or hopping a flight to somewhere.   

 But the latest aftermath from a price war between leading oil producers Russia and Saudi Arabia has also been consumed by energy firms. You can remember the very shocking news when, for the very first time in history, oil futures plunged below $0 in April. 

It is also likely that firms in other, easier industries, like far smaller companies, will even be weathering the pandemic economy, with debts of only a few million dollars instead of hundreds of millions. I don’t believe so, however. I guess we’ll be relating Covid-related bankruptcies to a flood soon. We’re in a quiet time right now as the water is flowing out into the bay, swelling the tidal surge. Yet, these economic circumstances will quickly create a proverbial pillar of insolvency. Why has this not always occurred? There are many explanations, I suppose. 

Help from Government Stimulus 

Government stimulus payments of up to $600/week enhanced regular unemployment insurance, providing families, at least briefly, a chance to keep up with their expenditures. The increased revenue expired on July 31, and it is unknown how much additional financial aid is on the way if any. 

With its lenient recovery conditions, the Paycheck Insurance Scheme helped several organizations navigate through the spring and summer by supplying them with funds to cover up to eight weeks of payroll expenses, plus benefits, a boon for workers who may otherwise have been furloughed and likely forced to claim personal bankruptcy. It was also necessary to use PPP funds to pay interest on deposits, leases, and electricity. The future of that help is up in the air, too. 

Shuttered or Slowed Down by revenue authorities and courts 

Meanwhile, tax debtors have enjoyed a short-term easing of financial strain since most tax agencies have been hit with their Covid-required internal slowdowns or shutdowns, like the IRS, California Franchise Tax Board, the California Department of Tax and Fee Management, and the Job Growth Department, and are only now getting up to pace. Taxpayers have purchased time by postponing the usual April 15 tax-filing deadline until July 15. 

Official frowning on foreclosures and courts that have closed against borrowers filing cases to recover back rent, garnish pay, and tax bank accounts have further relieved the financial strain. 

Conditions that hold insolvencies down have only improved. 

As several of these collection practices and hurdles have recently been eliminated, I expect that the tsunami-like increase in bankruptcy filings would arrive by the end of the year. Let me be clear: I have little satisfaction in saying this. I don’t want anyone or some company to go bankrupt. But as I’ve said before, if you think there’s a high chance that you or your organization might be in the direction of having to file for bankruptcy, whether it’s Chapter 7, 11, or 13, it’s best to weigh your decisions sooner rather than later. The more you sit down, the more complicated (and expensive) the technique is likely to be.

Latest Chapter 11 Small Company Bankruptcy Laws Come Just in Time 

It’s almost as if Congress foresaw our present economic downturn in its crystal ball when it approved the 2019 Small Business Reorganization Act, an enormous bankruptcy rule improvement since 2005. By reorganizing loans and allowing those companies sufficient time to compensate creditors, Chapter 11 was always meant to support distressed firms. Except for significant businesses, it was published and never performed well for smaller organizations, mostly because they cost so much and took too long. A month after the agreed-upon amendments took place last February, as part of their Covid-related relief legislation, senators dramatically increased the liability ceiling of the act for small enterprises, expanding the limit from gross debts of $2.7 million to $7.5 million, allowing for more small companies liable for bankruptcy insurance. 

Thus, although total bankruptcy files could be down, according to ABI figures, many small companies are still taking advantage of the new Chapter 11 regulations to navigate the ongoing crisis, as seen by the gradually growing amount of Chapter 11 filings since April.