laz
10-13-2004, 11:19 AM
By Marion Davis, Staff Writer
The figures defy experts’ predictions. Despite the post-9/11 slump, despite the snail’s pace of the recovery, despite the dim jobs outlook, Rhode Island bankruptcy filings are down dramatically: 10.1 percent from last year, 20.9 percent since 1998.
The number of business cases filed in U.S. Bankruptcy Court for the District of Rhode Island has dropped even more precipitously from 150 in the year ending June 1998, to 74 in the year ending last June 30.
Chapter 11 filings, the court-supervised reorganizations that shield debtors from creditors and buy them time to repay their obligations, have fluctuated from a high of 23 in 2000, to as few as six each in 2002 and 2003. But for a decade now, they’ve stayed well below the levels of the early 1990s; in 1991 they had peaked at 160.
On the personal side, while bankruptcies rose nearly 17 percent nationwide from 1998 to 2003 before taking a tiny 0.81-percent dip in 2004, in Rhode Island they dropped by 10.3 percent in those first five years, then another 10.8 percent from 2003 to 2004.
The 4,238 personal bankruptcy filings in Rhode Island in the year ending last June 30 marked the lowest point in seven years, but that’s still 44 percent higher than a decade before. And it’s an astounding 6.5 times the number filed in 1984, while nationally filings increased a bit less than sixfold.
What this suggests – and bankruptcy experts agree – is that far more than Rhode Island’s economic vigor, other factors play a bigger role: changes in Rhode Island’s business base, consumer attitudes and especially interest rates and real estate values.
The outlook on those fronts, experts say, points to a rebound in bankruptcies. The last year’s dip coincides with the lowest interest rates in a generation, a huge rise in property values and a spike in debt refinancing.
“I think it’s because of the interest rates more than anything else,” said Matthew J. McGowan, a lawyer and frequent lecturer on bankruptcy issues. All the New England states had comparatively low personal bankruptcy rates in the last year, McGowan noted, and “I think it’s because real estate values up here in the Northeast are pretty high. And they’re pushed higher, perhaps artificially, because of low interest rates.”
Consumer advocates and finance experts alike have been expressing concern for years about Americans’ growing indebtedness, and the growing use of bankruptcy as the only way out of a mountain of bills.
But in the Northeast, McGowan and others said, consumers have had a painless alternative: If they had, say, $20,000 in credit-card debt and their house had appreciated from $150,000 to $250,000, they could refinance an 8 percent mortgage at 5 percent, pay off the cards, and still end up with a lower monthly payment.
“If interest rates go up, and people can’t refinance their way out of a problem, then there’s bankruptcies,” said Charles A. Lovell, co-chair of the Partridge Snow & Hahn creditors’ rights practice group.
But for anyone with a variable-rate loan – an increasingly popular option in the recent wave of refinancings, and the typical setup for business loans – the impact of rising rates could be even more direct and immediate.
The low rates of recent times have saved businesses a great deal of money, equivalent to a 10-percent or 15-percent rent or health premium discount, said Allan M. Shine, a bankruptcy expert who represented Bess Eaton during its Chapter 11 proceedings.
“That’s real money in the businesses’ pockets, so it’s a very serious problem if those interest rates start to go high,” Shine said.
If companies do start having trouble, Shine and McGowan said, they may be more likely to go to court than in the past. Shine calls that a good thing – “the whole bankruptcy reorganization process is intended to give honest, legitimate, hard-working debtors an opportunity to save their businesses or to sell them.”
McGowan offered a dimmer view: “There’s less patience out there than there used to be, not just among entrepreneurs, but among banks,” he said. “Banks are less willing to work with people than they used to be.” Not long ago, he said, one bank tried to force one of his clients not only to pay its full debt, with interest, but also wanted a share of the company as part of the forbearance agreement.
It was a “ridiculous situation,” he said. “You would never have that in the past.”
One growing trend, Lovell said, is filing bankruptcy cases in districts handpicked for their attitudes toward debtors. His firm, for example, filed the DB Companies’ Chapter 11 in Delaware, despite the chain’s strong Rhode Island roots. “It tends to be more debtor-friendly in Delaware for corporations,” he said.
For businesses whose assets are all in Rhode Island, one other alternative to the Providence bankruptcy court has long been popular: state “receivership” filings, most of which go before Superior Court Judge Michael A. Silverstein.
In the first eight months of 2004, Silverstein said, 28 receiverships were filed in Providence and Bristol counties.
In the federal system, businesses can opt for Chapter 7 bankruptcy – a liquidation of assets to repay creditors, or a Chapter 11 to either reorganize and keep operating, or to prepare their assets to be sold for the best possible price (Bess Eaton’s choice).
Receiverships, for the most part, are used as alternatives to Chapter 7s or the prepare-to-sell kind of Chapter 11s. Attorneys said they like them because they’re less costly, offer much more flexibility, and can be completed faster.
Richard L. Gemma, chairman of the Rhode Island Bar Association’s debtors and creditors rights committee, said receiverships work well to package and sell a business without closing it or laying off staff. “If you can keep the lights on, you maximize the value of the business.”
Lawyers also opt for receiverships when only secured creditors – typically banks – can expect to be paid. The bankruptcy courts “don’t want businesses in a Chapter 7 or 11 unless they’re going to pay dividends to unsecured creditors,” Gemma said.
In both venues, one change is inescapable. Remember the big manufacturers’ liquidations of the 1980s and early 1990s? You hardly see those anymore.
“Years ago, most of the Chapter 11s involved jewelry companies and other types of manufacturing operations, and the auctioneers were busy,” said McGowan. “There are fewer of those left in Rhode Island now, so there’s fewer that could go into bankruptcy. Now what you see are service businesses and retail outlets.”
McGowan was the receiver in one of the last big manufacturing insolvencies, Elizabeth Webbing, the strap producer that had been Central Falls’ biggest employer. He tried to keep the massive textile mill as a manufacturing plant, but couldn’t find a buyer.
“People told me, it just doesn’t make economic sense to run that kind of operation in Rhode Island,” he said. “A good portion of the equipment ended up down south and even overseas.”
Published 10/09/2004
Issue 19-26
The figures defy experts’ predictions. Despite the post-9/11 slump, despite the snail’s pace of the recovery, despite the dim jobs outlook, Rhode Island bankruptcy filings are down dramatically: 10.1 percent from last year, 20.9 percent since 1998.
The number of business cases filed in U.S. Bankruptcy Court for the District of Rhode Island has dropped even more precipitously from 150 in the year ending June 1998, to 74 in the year ending last June 30.
Chapter 11 filings, the court-supervised reorganizations that shield debtors from creditors and buy them time to repay their obligations, have fluctuated from a high of 23 in 2000, to as few as six each in 2002 and 2003. But for a decade now, they’ve stayed well below the levels of the early 1990s; in 1991 they had peaked at 160.
On the personal side, while bankruptcies rose nearly 17 percent nationwide from 1998 to 2003 before taking a tiny 0.81-percent dip in 2004, in Rhode Island they dropped by 10.3 percent in those first five years, then another 10.8 percent from 2003 to 2004.
The 4,238 personal bankruptcy filings in Rhode Island in the year ending last June 30 marked the lowest point in seven years, but that’s still 44 percent higher than a decade before. And it’s an astounding 6.5 times the number filed in 1984, while nationally filings increased a bit less than sixfold.
What this suggests – and bankruptcy experts agree – is that far more than Rhode Island’s economic vigor, other factors play a bigger role: changes in Rhode Island’s business base, consumer attitudes and especially interest rates and real estate values.
The outlook on those fronts, experts say, points to a rebound in bankruptcies. The last year’s dip coincides with the lowest interest rates in a generation, a huge rise in property values and a spike in debt refinancing.
“I think it’s because of the interest rates more than anything else,” said Matthew J. McGowan, a lawyer and frequent lecturer on bankruptcy issues. All the New England states had comparatively low personal bankruptcy rates in the last year, McGowan noted, and “I think it’s because real estate values up here in the Northeast are pretty high. And they’re pushed higher, perhaps artificially, because of low interest rates.”
Consumer advocates and finance experts alike have been expressing concern for years about Americans’ growing indebtedness, and the growing use of bankruptcy as the only way out of a mountain of bills.
But in the Northeast, McGowan and others said, consumers have had a painless alternative: If they had, say, $20,000 in credit-card debt and their house had appreciated from $150,000 to $250,000, they could refinance an 8 percent mortgage at 5 percent, pay off the cards, and still end up with a lower monthly payment.
“If interest rates go up, and people can’t refinance their way out of a problem, then there’s bankruptcies,” said Charles A. Lovell, co-chair of the Partridge Snow & Hahn creditors’ rights practice group.
But for anyone with a variable-rate loan – an increasingly popular option in the recent wave of refinancings, and the typical setup for business loans – the impact of rising rates could be even more direct and immediate.
The low rates of recent times have saved businesses a great deal of money, equivalent to a 10-percent or 15-percent rent or health premium discount, said Allan M. Shine, a bankruptcy expert who represented Bess Eaton during its Chapter 11 proceedings.
“That’s real money in the businesses’ pockets, so it’s a very serious problem if those interest rates start to go high,” Shine said.
If companies do start having trouble, Shine and McGowan said, they may be more likely to go to court than in the past. Shine calls that a good thing – “the whole bankruptcy reorganization process is intended to give honest, legitimate, hard-working debtors an opportunity to save their businesses or to sell them.”
McGowan offered a dimmer view: “There’s less patience out there than there used to be, not just among entrepreneurs, but among banks,” he said. “Banks are less willing to work with people than they used to be.” Not long ago, he said, one bank tried to force one of his clients not only to pay its full debt, with interest, but also wanted a share of the company as part of the forbearance agreement.
It was a “ridiculous situation,” he said. “You would never have that in the past.”
One growing trend, Lovell said, is filing bankruptcy cases in districts handpicked for their attitudes toward debtors. His firm, for example, filed the DB Companies’ Chapter 11 in Delaware, despite the chain’s strong Rhode Island roots. “It tends to be more debtor-friendly in Delaware for corporations,” he said.
For businesses whose assets are all in Rhode Island, one other alternative to the Providence bankruptcy court has long been popular: state “receivership” filings, most of which go before Superior Court Judge Michael A. Silverstein.
In the first eight months of 2004, Silverstein said, 28 receiverships were filed in Providence and Bristol counties.
In the federal system, businesses can opt for Chapter 7 bankruptcy – a liquidation of assets to repay creditors, or a Chapter 11 to either reorganize and keep operating, or to prepare their assets to be sold for the best possible price (Bess Eaton’s choice).
Receiverships, for the most part, are used as alternatives to Chapter 7s or the prepare-to-sell kind of Chapter 11s. Attorneys said they like them because they’re less costly, offer much more flexibility, and can be completed faster.
Richard L. Gemma, chairman of the Rhode Island Bar Association’s debtors and creditors rights committee, said receiverships work well to package and sell a business without closing it or laying off staff. “If you can keep the lights on, you maximize the value of the business.”
Lawyers also opt for receiverships when only secured creditors – typically banks – can expect to be paid. The bankruptcy courts “don’t want businesses in a Chapter 7 or 11 unless they’re going to pay dividends to unsecured creditors,” Gemma said.
In both venues, one change is inescapable. Remember the big manufacturers’ liquidations of the 1980s and early 1990s? You hardly see those anymore.
“Years ago, most of the Chapter 11s involved jewelry companies and other types of manufacturing operations, and the auctioneers were busy,” said McGowan. “There are fewer of those left in Rhode Island now, so there’s fewer that could go into bankruptcy. Now what you see are service businesses and retail outlets.”
McGowan was the receiver in one of the last big manufacturing insolvencies, Elizabeth Webbing, the strap producer that had been Central Falls’ biggest employer. He tried to keep the massive textile mill as a manufacturing plant, but couldn’t find a buyer.
“People told me, it just doesn’t make economic sense to run that kind of operation in Rhode Island,” he said. “A good portion of the equipment ended up down south and even overseas.”
Published 10/09/2004
Issue 19-26