While they became stronger in 2009 (yes they became stronger), the financial institutions were more willing to write off the bad debts of companies and were less likely to restructure debts when companies became delinquent.  The result became a substantial increase in business bankruptcy filings in 2009.  The number of businesses filing for bankruptcy in 2009 increased by 38% from the numbers reported in 2008(1). 

The other factor that contributed to the substantial increase in business bankruptcy filings is the economy.  With the high costs of gas, materials and food coupled with low consumer turnout in the marketplace, businesses’ profit margins were unable to meet the demands of the companies’ debts. 

Along with the increase in business bankruptcy filings in 2009, companies’ default rates hit a record high in 2009(2).    While some experts predict that the growth of business bankruptcies will taper off in 2010, the majority of experts think otherwise.  Such factors as being unable to find financing, being unable to instill consumer confidence due to high unemployment and foreclosures and being unable to handle defaults in the commercial real estate industry, means that a slowdown in business bankruptcy filings is unlikely.  The industries that are most suspect to seeing business bankruptcy filings are retail, media, commercial real estate and transportation. 

With the increase number on business bankruptcy filings, creditors need to monitor accounts closer.  The following are some general tips to make sure you are on top of the situation.

Tips for Chapter 11 Creditors with Claim:

1. Have a game plan on what you as a lender want from the company.  What will yield the best return for you- liquidation or being patience to see if the company will become viable
2. If you have a first lien on all the business assets, you will need to seek attorney representation to begin negotiations with the debtor in possession(3).   Many times these negotiations may take place prior to the filing.  The most important items as a first lien holder are to protect your first lien position post bankruptcy filing as well as receiving adequate protection payments while waiting for the Chapter 11 Plan to be confirmed.  Look out for a Motion to Use Cash Collateral, which generally is one of the first motions filed after a bankruptcy petition
3. All creditors holding a secured claim need to make sure that the Debtor in Possession does not attempt to modify the loan contrary to bankruptcy law.  Consult an attorney if you do not agree with any treatment of your claim.  Look out for Disclosure Statements, Chapter 11 Plans or any Motions that might affect your claim (Motion to Sell Property, Motion to Avoid Lien)
4. File your Proof of Claim
5. Be on the Creditor’s Committee, if applicable

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(1)Information pulled from Automated Access to Court Electronic Records (AACER)

(2)Information pulled from Standard & Poor’s

(3)Debtor in Possession is a technical term used in bankruptcy.  In essence, the Debtor in Possession is the debtor