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Four Reasons to Represent Creditors in Commercial Bankruptcies

July 09, 2020 (3 min read)

It’s not exactly litigation; it’s not exactly contract negotiation. Bankruptcy practice is a unique beast, and for that reason, some lawyers don’t even consider it as a potential area of practice. But those lawyers could be turning away from an opportunity.

Bankruptcy law certainly has a learning curve, but it’s not as steep as you might think. If you know what an I.O.U. is, you understand why creditors deserve good representation when businesses that owe them money go bankrupt.

As it turns out, there are plenty of reasons for lawyers to get involved in representing creditors in business bankruptcies right now. Here are four of the most important ones.

1. High Demand

It’s a law of nature in the marketplace—when the economy heads downward, bankruptcies increase. No one is popping champagne over this phenomenon though, particularly in the midst of a pandemic that has had a brutal impact on the economy in general, and retail businesses in particular. But for law firms, many of which are having down years themselves, it means there is at least one area in which demand for legal services is certain to increase: commercial bankruptcies.

According to the American Bankruptcy Institute, chapter 11 bankruptcy filings by businesses increased almost 50 percent year-over-year in May of 2020, which would be the very front edge of the expected wave of bankruptcies caused by COVID-19. These business bankruptcies are hitting the legal system much faster than consumer bankruptcies, which actually decreased by more than 40% in May 2020 compared to May 2019. Various forms of government debt relief, including moratoriums on foreclosures, are credited for keeping consumer bankruptcies at bay for the time being.

2. Gaining Entry to Additional Lines of Work

Representing creditors in business bankruptcies is a promising entryway to new lines of work. For the law firm that has not worked in bankruptcy law before, representing creditors is, generally speaking, manageable work; in some cases, an attorney’s role will be limited to filing a proof of claim.

Lawyers and firms can use such engagements to gain experience in the field before tackling bigger engagements like representing business debtors. Even firms that never aspire to get deeper into bankruptcy work can use a creditor’s rights practice to drive business. In a thriving creditors’ practice, lawyers develop client relationships with a large number of businesses, giving them the many opportunities to cross-sell other practice areas to clients.

3. Taking a Walk on the Plaintiff’s Side

When you play pitcher all the time, it can be a thrill to step to the plate as batter for a change. Likewise, litigators accustomed to representing defendants—or business lawyers who rarely step in a courtroom at all—can find professional satisfaction in going on the offensive for once. Of course, lawyers who are accustomed to representing plaintiffs will be right at home in a creditor’s rights practice.

4. Diversifying Your Practice

A smart investment portfolio is diversified—shouldn’t your mix of practice areas be too? Certainly, it makes a lot of sense to be representing creditors at a time when bankruptcies are busy. But even in the best economic times, bankruptcy practices act as a kind of insurance policy against the ever-present threat of recession.  

Should You Add Bankruptcy Law to Your Practice?

Of course, none of this should suggest that representing creditors is for everyone. Bankruptcy procedures can get complicated, and the consequences for failing to adhere to them can be significant. A creditor that violates the automatic stay on collection activity imposed when a bankruptcy petition is filed, for instance, can find themselves paying damages, costs or fees. As one North Carolina firm put it, “the Bankruptcy Code contains several traps for the inattentive creditor that can effect a partial or wholesale waiver of creditor rights . . . or, in extreme instances, subject the creditor to sanctions and other penalties.”