If you own a small business you are most likely very concerned about making it through the next few months. Unfortunately, one of the inevitable consequences of the ongoing Covid-19 crisis is the increase in business closings – temporarily or permanently.
We have already seen a long list of large, well-known businesses close permanently or file Chapter 11 Bankruptcy petitions. That list will get longer every day. We also expect to get a large number of small and mid-sized businesses who have to file for Chapter 11 in the coming months. Landlords may start to lose patience over past-due rent, courts open back up for evictions, and other creditors generally lose patience as they face their own financial issues.
The New York Times recently published an article about the small business bankruptcies that are expected to be filed. The article gave particular attention to the “Small Business Restructuring Act” that, very fortuitously, became effective in February of this year. The intent of the new law, also known as “Subchapter 5 Bankruptcy,” is to reduce the normally high costs of reorganization proceedings for small businesses. Initially, the debt limit for qualifying for the new Subchapter 5 was $2.72 million but Congress raised the debt limit to $7.5 million as part of the recent stimulus programs. This new debt limit significantly increases the number of small businesses that will qualify for, and benefit from, Subchapter 5.
If you have a small or midsize business facing financial difficulties there are a few steps you can take now to prepare for a possible reorganization. The most important first step is to speak with a good business bankruptcy and reorganization lawyer in your area. Most lawyers will be glad to speak with you and meet with you, when appropriate, at no initial cost. It is important to make sure you speak with lawyers who have significant experience in business bankruptcy and reorganization cases rather than lawyers who may gravitate to the practice due to the crisis. The lawyers who advertise “no money down” cases on television may do a fine job with personal bankruptcies, but they typically do not handle business cases.
One of the first questions a lawyer usually asks is for a brief summary of your current debts so it is often helpful to start gathering this information. This includes the general amount and status of secured debt, such as bank or real estate loans, lease obligations, unsecured loans and credit card debt, and trade debt owed to key suppliers. This is also a good time to note any business debts that have been personally guaranteed by the owner.
What you should not do is wait until a real emergency, such as an eviction suit, getting cut off by a key supplier or getting behind on employee wages and taxes. Contacting a lawyer sooner than later is by no means a guarantee that a small business will survive but the chances are much greater by planning as well in advance as possible.