Too bad I’m a retired attorney. When I started my practice all I did was bankruptcy work, for both debtors and creditors, and it remained a significant portion of my job even after I switched to other areas of the law. Because right now, lawyers who specialize in bankruptcy law are in hog heaven, so to speak:
For five years, San Francisco attorney Tilden Moschetti practiced family law, but in November, he shifted his legal attention to reflect the demand in the market: personal bankruptcy filings.
As the economic downturn cuts jobs in many professions, the consumer bankruptcy attorney has thrived: Membership in the National Association of Consumer Bankruptcy Attorneys jumped by one-third in 2008, to an estimated 3,200 practicing lawyers.
The glut of clients is a welcome turn of events for bankruptcy lawyers, if an unfortunate one for their clients, said Ike Shulman, a San Jose attorney and co-founder of the National Association of Consumer Bankruptcy Attorneys.
In San Francisco, filings at the U.S. Bankruptcy Court jumped to 20,067 in 2008 from 12,025 in 2007, and bankruptcies filed in California are up nearly 50 percent from last year, according to a study by the Consumer Bankruptcy Project at Harvard. More than 1.3 million people in the United States are expected to file in 2009.
Shulman said his brethren sat at the brink of extinction in 2005, when Congress passed the Bankruptcy Abuse Prevention and Consumer Protection Act, intended to discourage a new generation of college graduates who were filing for bankruptcy to get out from under mounting student loans and overwhelming credit card debt. The number of filings, which had steadily averaged 1.5 million per year, dropped to 600,000 in 2006, the year after the act passed, leaving attorneys scrambling for clients.
“Many of us thought the real intent in 2005 was the credit card companies to drive the bankruptcy attorneys out of business,” Shulman said. “Many of us got out at that time. There just wasn’t enough business to go around. … It’s like they were making it so difficult for us to do our job, they wanted us to die off without killing us.”
Actually, Attorney Shulman isn’t far off. The credit card companies did want to kill off consumer bankruptcy lawyers, but more as an added benefit. What they really wanted to do what cut the costs and losses they incurred when people who were maxed out on credit filed bankruptcy. You see most banks and credit card companies wanted people in debt, they just didn’t want them to be able to walk away from that debt. What the bankruptcy code revisions did was force many people to use the equity in their their homes as a means to pay off their credit cards, rather than file bankruptcy.
And it worked, too. That is, it worked so long as the real estate bubble lasted. Banks earned fees from home equity lines, and banks and credit card companies earned fees from consumers (and retailers) who continued to use their credit and debit cards (often branded with the Visa or MasterCard logos) to buy, buy and buy some more. It was a great little racket they had going — until the bubble burst and the housing market collapsed, triggering the Fall of the House of Greenspan and with it the Bush Economy.
Of course, consumer bankruptcy attorneys are just the small fry. The real money to be made is representing debtors, or their creditors, in corporate bankruptcies, especially in Chapter 11, the reorganization chapter of the bankruptcy code. And wouldn’t you know that corporate Chapter 11 reorganization filings are expected to boom this year, as well. However, it won’t be as easy as it used to be for companies seeking to reorganize under Chapter 11 because many banks and traditional lenders won’t show them the money (i.e., debtor-in0-possession or DIP financing) they need to keep themselves afloat long enough to retool their businesses and shed debt:
(cont.)
NEW YORK (Reuters) – There are likely to be a slew of bankruptcies this year, but the process will be more challenging and costly than ever as a drought in bankruptcy loans has changed the rules of the game. […]
“DIP financings are either not available in any significant size, or if they are available the pricing is scary,” said Henry Miller, co-chairman of turnaround advisory firm Miller Buckfire & Co LLC.
DIP financing, which allows bankrupt companies to pay suppliers and employees as they try to become profitable again, had long been a popular form of financing as DIP lenders are typically among the first creditors repaid in a bankruptcy.
However, tight lending markets now mean many companies must rely on existing lenders or other parties with a stake in the bankruptcy’s outcome to provide the DIP.
“DIP financing is not easily available. It’s expensive. It’s scarce — and that used to be the easiest part of a bankruptcy filing,” said David Resnick, co-head of investment banking at Rothschild.
Well, that just means the “vultures” will have a field day. Indeed, if I had a lot of cash right now I’d seriously consider starting up a DIP lending fund. Because DIP lenders can charge more, and their loans are guaranteed to be paid back first, before anyone else, reducing their own risk and shifting it instead to the debtor company’s other, existing creditors. Indeed, I expect DIP lending will be the one sector of the financial industry that does very well in the next few years:
“The fourth quarter was a very challenging one for the capital markets,” said Rob McMahon, managing director for restructuring at GE Commercial Finance, noting it was difficult to obtain approval to make loans at that time.
But for 2009, McMahon says he is “very optimistic” and is also looking at DIP loans now.
“This is definitely a market to be in in 2009,” he said. […]
“I’m optimistic that we will see investors return to the DIP market in the first half of 2009 for the right return and the right structure,” said Mark Cohen, global head of restructuring and workout at Deutsche Bank in New York.
I’ll bet Warren Buffet, and other cash rich investors like him, is already positioned to make money off distressed companies bey getting into the field of DIP financing. That’s how smart rich people make their money in an economic downturn. For you and me, however, things aren’t so fortunate. When companies file for bankruptcy protection the first thing they do is look to shed costs. And that typically means cutting jobs, lots of them. It also means shafting smaller businesses who are their suppliers, which leads to more bankruptcies and insolvencies for smaller firms, and more job losses.
Another group that will be hit hard is anyone invested in the commercial real estate market, because as companies downsize, they typically abandon leases for commercial retail and office space. Indeed, that’s one of the benefits of chapter 11: you get to shed any contracts or leases and turn your suppliers and landlords into unsecured creditors who will be lucky to get pennies on the dollar for the money owed to them. In fact, we are already seeing a number of large real estate firms who specialize in retail space going under, like the company that formed the basis of Tom Friedman’s heiress wife’s fortune.:
General Growth [Propeties] warned in a Securities and Exchange Commission filing Nov. 10 that it is in danger of default on $900 million in mortgage debt due Nov. 28, and another $58 million in corporate debt due Dec. 1, and may have to take legal steps to protect itself from its creditors. […]
General Growth, which owns or has interests in more than 200 shopping centers, is the second-largest mall owner/operator in the United States. Only Indianapolis-based Simon Property Group is larger. […]
Once one of the country’s highest-flying real-estate investment trusts, General Growth racked up debt with a buying spree that included the $12.6-billion purchase of rival mall operator Rouse Co. in late 2004.
“They took a big, big gamble, and it did not pay off,” said Rich Moore, of Cleveland-based RBC Capital Markets, in an interview.
Indeed, General Growth Properties may be filing for Chapter 11 any day now, which can’t make Tommy Friedman very happy, seeing his billionaire status put at risk. However, when big commercial real estate firms go under, guess what? They don’t pay their local taxes. And the stores that go out of business in the malls they own don’t generate any sales taxes. Which means many local municipalities lose a large amount of the revenues they depend upon to finance schools, fire fighters, police and other essential services.
Which again brings the financial hurt back to you and me. Tom Friedman will manage just fine, trust me. It’s our jobs, our families livelihoods and the future for our kids which are really in danger today. Which makes you wonder why any Democrat would continue to support extending Bush’s tax cuts for the rich. I sure don’t see any reason for letting the people who profited and partied off the decline of the middle class in America over the past three decades getting away scot free with their often ill earned gains.
But the tax-cut components of the package are hardly a clean break with the Bush years, presuming that is what Mr. Obama meant by the troubled past. To win the support of Republican lawmakers, the package is shaping up to include roughly $150 billion in business tax breaks, even though such breaks are widely recognized as packing very little bang for the buck when it comes to economic stimulus. […]
The deteriorating job situation also calls for ensuring that states do not have to make unduly burdensome cuts in their own budgets. State and local governments are big employers in their own right, and money that is fed through them quickly reaches beneficiaries and contractors, as well as employees, helping to save and create jobs by supporting demand.
Every dollar spent on a politically expedient tax cut is money that is not spent where it could do more good. It also perpetuates the corrosive debate in which taxes are portrayed as basically evil and tax cuts as unmitigated good. That is not a debate that Mr. Obama should engage.
But what do I know? I’m only an ex-bankruptcy attorney who watched banks and rich folks (admittedly many of them my clients at the time) get away with losing their investors’ and shareholder’s monies right and left in the 1980’s and 90’s while still making out like bandits themselves. Maybe that’s just the way the world works. But it sure isn’t the change I voted for this past Fall. That much I do know.
