According to the Administrative Office of the U.S. Courts, business filings rose 23.3% in the 12-month period ending June 30, 2023. Chapter 11 filings have jumped 68% in the first half of the year, as compared to prior year. For context, bankruptcy filings over any 12-month period have increased rarely since the peaks of 2010. With the increased risk of bankruptcy, transactional lawyers need to review and tighten their due diligence practices to protect their clients, according to Wolters Kluwer CT Corporation.
“If you represent lenders or other secured creditors, you’ll want to ensure that your clients’ security interests are perfected,” Elina Balagula, transactional business consultant, CT Corporation, Wolters Kluwer Financial & Corporate Compliance, said.
Balagula goes on to illustrate some of the most common mistakes made — from errors in listing the debtor name and using the correct UCC form, to filing in the correct jurisdiction and remembering to include needed supporting attachments — and what law firms need to look out for in existing liens to ensure that if a bankruptcy does occur, their client gets prioritized in getting paid back.
“While there are many deals where lenders knowingly take on greater risk by holding unsecured debt in the hopes of higher returns, there are unfortunately also many situations where lenders believe to be secured only to find out in bankruptcy proceedings that their lien was unperfected. In bankruptcy, unsecured debt is the least preferred position and the last to recover,” Balagula said.
