The Next Wave in Business Bankruptcies: Middle & Lower Market Companies

‘Hope isn’t a business strategy,’ Robert Forshey Tells Texas Lawbook

Bankruptcy filings shattered records in 2020, but most of the companies seeking bankruptcy protection in Texas were very large companies with assets or debts of $500 million or more, according to a recent report in The Texas Lawbook.

Bankruptcy filings by smaller companies — those citing $250 million in assets or liabilities — grew by only 3.5 percent, Lawbook reports. Several prominent Texas bankruptcy lawyers, including Forshey Prostok name partners Jeff Prostok and Robert Forshey, told the publication that they predict those statistics will change in the near future.

“We’ve been surprised that we haven’t seen more bankruptcy activity in the middle market,” Prostok tells Lawbook. “But keep in mind, it is hard to restructure when the future is so unknown.”

Forshey says one of the reasons larger companies filed sooner is because their managers were more proactive “in identifying the early factors of financial distress.”

“Many small and middle market business owners are in denial,” Forshey said. “They wait too long to see about reorganizing. If they don’t have the cash, it is very difficult to reorganize. You need cash to effectively reorganize.” 

Forshey said cash flow issues are a clear signal that business should consider the Chapter 11 route.

“The business isn’t paying its vendors on a timely basis and is surviving on a robbing Peter to pay Paul basis,” he said. “Many middle market managers play that game as long as possible until the cash runs out. The problem by then is that their credibility may be lost with the lender and vendors and they often lack the necessary cash to make a bankruptcy case work. 

. . .

 He said bankruptcy lawyers need to walk business leaders through all options to find the best one.

“Sometimes that is a bankruptcy filing,” Forshey said. “Sometimes that is a work-out; sometimes it is a sale; and sometimes it’s just too late to do much of anything. Cash is king in a bankruptcy case. If the business has hit the Peter/Paul stage, the managers should begin to explore all options. 

“That, and accepting the fact that hope isn’t a business strategy,” he said.

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Forshey Prostok LLP provides extensive experience in all areas of bankruptcy law from its offices in Fort Worth, Dallas, and Houston. The firm’s scope of representation includes handling complex business reorganizations, enforcing of creditor’s rights, leading commercial and bankruptcy-related litigation, overseeing creditors’ committees, directing workouts, and closing bankruptcy acquisitions. Forshey Prostok is ranked by the Chambers USA legal guide and received a Regional Tier 1 ranking from Best Law Firms for bankruptcy and creditor/debtor rights. For more information, visit https://forsheyprostok.com/.