Coronavirus financial pressure: When should a small business consider filing for bankruptcy
A new, streamlined bankruptcy option makes the process less daunting, and less expensive for small businesses
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Coronavirus-related stay-at-home, lockdown and social distancing measures have put pressure on small businesses throughout the U.S., which means some business owners may want to explore a formal restructuring through bankruptcy.
Joe Pack, an attorney at Pack Law, told FOX Business he is seeing an uptick in bankruptcy filings, but it is not isolated to small businesses or even any one specific industry.
“Sort of like the pandemic, there’s really no discrimination,” Pack said. “Whether the companies are sexy or not, are large or not … it’s affecting all of them.”
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But small businesses, in particular, may have less financial flexibility to weather a pause in operations when compared with larger companies. They may also have less access to alternative sources of liquidity.
Pack said if a company is questioning its financial stability, it doesn’t hurt to make some calls regarding potentially filing for bankruptcy, even as a means to simply learn what options are available.
“What a company doesn’t want to do is wait too long to start even exploring this,” Pack said. “It doesn’t mean you have to go into bankruptcy.”
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So what are some signs that you may want to explore bankruptcy protection?
- Was your financial situation precarious before the pandemic broke out? Business owners to take an honest, holistic view of their operations in order to assess whether they are really struggling because of the virus, which is a temporary situation, or because of preexisting problems, Pack said.
- Business owners should consider how much cash, runway and rope they have to weather the crisis.
- Small businesses need to consider their ability to follow through on obligations to lenders. Many creditors waived late payments for business owners, but that’s often “not enough” to assume they are liability-free, Pack said. A loan often has a number of other covenants that you could find yourself violating after 90 days if you don’t carefully check the fine print.
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The good news for small businesses looking to restructure is that the Small Business Reorganization Act, which took effect in February, added a feature to the bankruptcy code known as subchapter V, which is a streamlined, less expensive bankruptcy process designed for small businesses. The provision initially applied to businesses with debts of $2.725 million, but the CARES Act increased the debt threshold to $7.5 million.
Under subchapter V, only a debtor can file a plan, which must be done within 90 days of filing for bankruptcy. There is no committee of unsecured creditors who need to approve the plan. Instead, the plan is expected to be approved so long as the debtor allocates discretionary income toward plan payments over the course of three to five years. The owner also does not have to pay creditors in full in order to retain control.