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Bankruptcy May Be Your Company’s Best Option to Survive COVID-19

As stimulus aid begins to run out, the challenges posed by the ongoing COVID-19 pandemic are becoming overwhelming for many businesses. The retail and hospitality industries have been particularly hard hit in the wake of lengthy government-mandated closures and continuing occupancy restrictions.

Fortunately, there are ways to move forward without losing your business.

Bankruptcy can offer the opportunity to reorganize your company without closing your doors, laying off employees or harming your relationships with vendors and customers. While some business owners are understandably wary of bankruptcy due to the stigma that still surrounds the process, it may be the key to surviving the pandemic.

You may not be alone — bankruptcy filings are predicted to skyrocket in the coming months. As of July, almost 100 companies with more than $100 million in debt had filed for Chapter 11 bankruptcy protection, according to the American Bankruptcy Institute. 

Understanding the Process

In a Chapter 7 business bankruptcy, all business assets are liquidated by the bankruptcy trustee and used to pay as many creditors as possible. In most cases, the business is closed at the end of the proceedings. As a result, Chapter 7 may be an attractive option if business owners are ready to walk away.

In contrast, a Chapter 11 business bankruptcy allows the debtor to restructure as a means to pay down debt. Under Chapter 11, the bankruptcy court will approve a reorganization plan, which may involve modifying the payment terms for existing debts, restructuring financial obligations and/or selling assets to pay debts. The business remains operational throughout the bankruptcy process under the supervision of a bankruptcy trustee.

Once the debtor makes all payments required under the reorganization plan, it can seek a discharge of its remaining unsecured debts. While Chapter 11 often makes sense for large corporations, the time and expense involved often makes it impractical for smaller businesses.

SBRA: Another Option

The Small Business Reorganization Act of 2019 (SBRA), also referred to as Subchapter V, established a streamlined Chapter 11 bankruptcy process for small businesses. Under the SBRA, debtors are not subject to the more costly requirements in Chapter 11. For instance, a committee of creditors will not be appointed unless ordered by the court for cause, and a debtor will generally not be required to prepare a disclosure statement. To further discourage contested hearings, only the debtor can file a plan of reorganization.

To fast-track cases under the SBRA, an initial status conference must be held within 60 days of filing a petition. The debtor must file a Chapter 11 plan within 90 days of its bankruptcy filing. Much like in a Chapter 13 case, a standing trustee is appointed to oversee each case and to “facilitate the development of a consensual plan of reorganization.”

In another small-business friendly change, the SBRA eliminates the “absolute priority” rule, which requires that a Chapter 11 plan be approved by all classes of creditors in order for business owners to retain their ownership interest. Instead, equity owners can keep their ownership so long as the plan doesn’t “discriminate unfairly” and is deemed “fair and equitable.”

The SBRA also makes it easier for the debtor to confirm a plan over creditors’ objections. Generally, a plan will be confirmed, provided that it requires that all of the debtor’s projected disposable income (income that is available after the payment of ongoing business expenses) will be used to make plan payments for the next three to five years. 

In response to COVID-19, the SBRA is currently available to a wider range of debtors (individuals or entities). The Coronavirus Aid, Relief and Economic Security Act (CARES Act) amended the SBRA to temporarily increase the debt threshold from $2,725,625 to $7.5 million for new cases filed between March 28 and March 27, 2021.

Carefully Weigh Your Options

For businesses that are struggling under the weight of coronavirus, determining the best path forward can be a daunting process, particularly when faced with both mounting debt and declining revenues. Nonetheless, it is important to recognize that shutting your doors is not your only option. In some cases, a Subchapter V bankruptcy may provide a vital lifeline that can carry you through the pandemic and even leave you stronger on the other side.

Howard D. Bader serves as general counsel for clients in a wide range of industries on an international scale. With over three decades’ worth of legal experience, he has represented clients in numerous legal matters, including commercial litigation, intellectual property, bankruptcy and creditor’s rights and mergers and acquisitions, as well as numerous corporate transactions and business law matters.

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