Bankruptcy May be the Only Way Out

by Paul H. Aloe, Esq.

Running a small business in the best of times can be difficult. Running one during a pandemic can be nearly impossible. A study by Yelp! found that more than 160,000 businesses that were open in April 2020 had closed by September. That’s roughly 800 businesses closing every day.

If you run a small business and are still afloat, congratulations, you made it this far. But, if you are struggling to keep your doors open, you have options. The bankruptcy code can help you stay in business while you reorganize your outstanding debt and other obligations, and there are new features designed specifically for small businesses.

For example, say you own five stores, two are doing great, but three are barely holding on. Bankruptcy can allow you to renegotiate your leases for those three stores and come to terms more favorable to you with your creditors and suppliers. If you were doing well before the pandemic, bankruptcy can help you negotiate terms with your creditors and suppliers that more accurately reflect the present economic conditions.

Traditionally there were two options for businesses in the bankruptcy code, Chapter 7 and Chapter 11. Under Chapter 7, the debtor business liquidates all their assets, which are then distributed among its creditors, and goes out of business. Under chapter 11, the debtor business retains control over their business while working out payment arrangements with creditors, allowing them to stay in business.

However, Chapter 11 comes with reporting requirements and other mandates as well as fees which make it expensive and time consuming and often prohibitive for small businesses. That changed with the passage of the Federal Small Business Reorganization Act (SBRA) of 2019 and the introduction of Subchapter V.

Bankruptcy under Chapter 11 has been the typical option for large businesses. It allows them to stay open while they reorganize and re-emerge, typically smaller and none the worse for wear. They can afford the high costs associated with Chapter 11 bankruptcy and have the resources to comply with the reporting requirements.

For small businesses the options were limited; pay the high costs of a restructuring under Chapter 11, struggle on, or declare bankruptcy under Chapter 7 and go out of business altogether.

The SBRA’s Subchapter V offers small businesses the best of both worlds – the ability to retain control over their business under Chapter 11 and the simplicity and lower overall cost of Chapter 7. Many of its provisions lower the costs associated with fees and the process itself and streamline reporting and disclosure requirements.

For example, in Chapter 11, the debtor files a disclosure statement and a detailed plan for reorganization. Once the debtor files the statement, creditors are free to file their own, competing plans. Under Subchapter V, only the debtor files a plan of reorganization and is not required to file the disclosure statement. Eliminating the competing plans of reorganization keeps the parties out of court hearings, saving time and money for the debtor.

As originally enacted when it went into effect in February of 2020, a company could file for bankruptcy protection under Subchapter V if they had debts totaling less than $2,725,625. The Coronavirus Aid, Relief and Economic Security Act (CARES) raised the ceiling to $7,500,000 until March 27, 2021. A bill is currently under consideration to extend the higher ceiling until March 27, 2022.

It’s important to keep in mind that bankruptcy is harsh medicine, and not always the right medicine. Do your homework before meeting with a lawyer. Typically, companies wait too long, until their accounts are completely dried up and they have nothing left. The bankruptcy process has costs and if you choose Chapter 11 or Subchapter V you will need money to stay in business. Finally, bankruptcy is not a solution for a poorly performing business. If you were doing badly before the pandemic, you can’t blame the pandemic for your problems and bankruptcy won’t save you.

For companies that have a strong underlying business but may be adversely affected by the pandemic, under Subchapter V, bankruptcy can be a new beginning. Whatever business struggles you are going through now, it’s important to know there are options and a means to reorganize your debt while maintaining control of your business. Subchapter V gives small businesses a process similar to Chapter 11, but at a fraction of the cost.

Paul H. Aloe is a partner at Kudman Trachten Aloe Posner LLP. He concentrates his practice in the following areas: litigation, bankruptcy, zoning and land use, commercial real estate, business reorganizations, business law and employment litigation. He graduated from Maurice A. Deane School of Law at Hofstra University in 1983. He received his BA from The George Washington University in 1980. You can reach Paul at [email protected].

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About the Author

Dr. Jerry Doby Editor-in-Chief of The Hype Magazine, Media and SEO Consultant, Journalist, Ph.D. and retired combat vet. 2023 recipient of The President's Lifetime Achievement Award. Partner at THM Media Group. Member of the U.S. Department of Arts and Culture, the United States Press Agency and ForbesBLK.