Small Businesses Considering Bankruptcy Need to Act Now

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COVID-19 dealt a financial blow to small businesses unlike anything we have seen before. Stay at home orders forced businesses already operating on thin profit margins to shut their doors and implement drastic changes to their business models in order to comply with new social distancing requirements.

A survey by SMB Group found that 75% of all small business report that COVID-19 is negatively impacting their businesses and almost two-thirds believe revenues will drop by 30%. OpenTable predicts 25% of restaurants will never re-open.

Major retailers such as Nieman Marcus, J. Crew and J.C. Penny have already filed bankruptcy. Here in North Carolina, several well-known establishments have already announced they will not be able to reopen in the wake of COVID-19 financial pressures.

CARES ACT MAY NOT BE ENOUGH

The Coronavirus Aid, Relief, and Economic Security Act (CARES Act) attempted to offer relief to small businesses through short-term loans designed to help businesses meet payroll, rent and utility obligations. However, the ever-changing rules on loan forgiveness may end up saddling small business owners who were successful in obtaining a loan with more debt at a time they can least afford it if they fail to comply with the strict forgiveness guidelines. Other than these temporary loans, economic relief for small businesses has been limited.

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SUBCHAPTER V MAY HELP

Congress may have recognized that bankruptcy may be the only way forward for many businesses, as it amended the definition of a small business in the CARES Act to allow more small businesses to take advantage of the newly enacted Subchapter V of the Bankruptcy Code. Subchapter V removed many of the overwhelming costs and other impediments to filing bankruptcy that small businesses face in filing a traditional chapter 11 case. The closure of the state courts and the moratorium on foreclosures and evictions has also offered some temporary relief as creditors have been unable to take action against delinquent borrowers. However, once the courts reopen, economics expect the rate of foreclosures and lawsuits to spike, especially on commercial loans, as many of the prohibitions on foreclosures and evictions in the CARES Act were geared toward consumers.

INVESTIGATE YOUR OPTIONS NOW

Most business owners make the mistake of waiting too long to seek legal advice about financial matters. Instead, business owners will use up all their resources trying to pay their bills, leaving them with few alternatives when they eventually run out of cash or an unexpected expense occurs. Often this includes the business owners’ personal resources as well, placing their families further at risk if the business ultimately fails. In tough financial times, conserving your resources until you have a comprehensive plan to address all your creditors is often a better option than simply dealing with the creditor who is the most aggressive.

Many business owners also reject bankruptcy as a viable option because they believe it means they will have to close their doors. Instead, chapter 11 allows businesses to continue to operate normally under the bankruptcy court’s supervision. During the case, a business owner formulates a plan to repay its creditors, and can involve lowering monthly payments, repaying loans over a longer period of time, or eliminating debt that the business simply can no longer afford to pay. This plan can be implemented even if all your creditors do not agree to modify their debts.

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Now is the time for business owners to consult with a lawyer experienced in bankruptcy, financial workouts, and business restructurings to take the first steps toward getting back on a sound financial footing. Everyone agrees that small business owners face a bleak outlook. For most businesses already operating on a thin profit margin, the math of catching up lost revenue simply will not work. Bankruptcy can give your business time to reassess your operations, conserve cash flow, and reassess how your business needs to move forward. As businesses face the tough choices, those that investigate all their financial options early on in the process will have the best chance of protecting the business they have built.

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