The New York Times recently published an article highlighting the financial plight of small businesses throughout the United States. Businesses are stuck with the worst possible combination of policies: COVID-19 shutdowns and regulations, but no federal funding to compensate for the loss of revenue.
Businesses under distress prior to the pandemic were among many of those to shut down during the early stages of 2020. Other healthy businesses, however, were able to resist closures by taking advantage of SBA loans and federal relief programs. In addition to federal funding, favorable weather conditions allowed many businesses to remain open despite social distancing limitations by expanding operations to the outdoors.
Now, winter is coming and ushering in a new season of challenges for small business owners: federal funding programs have largely run dry; colder weather has eliminated the option for outdoor sales in many parts of the country; and, with the 2020 Presidential Election right around the corner, a shift in the political climate could change the legislative landscape in unexpected ways.
As American business owners brace this new period of uncertainty, many will want to evaluate their options for reducing losses and maximizing profits.
Is Bankruptcy an Option for Small Businesses?
The passage of the Small Business Reorganization Act (SBRA) of 2019 has made filing bankruptcy a much more affordable option for small businesses with limited resources.
Before this act, Chapter 11 bankruptcy was an effective option only for large corporations that could afford the filing costs. Small businesses, on the other hand, typically could not afford Chapter 11, but their only other option was liquidation through Chapter 7.
The SBRA, however, added Subchapter V to Chapter 11 bankruptcy. Subchapter V is a form of reorganization that is only available to qualifying small businesses. If your small business owes less than $7,500,000*, you may be eligible for relief under Subchapter V.
The benefits of Subchapter V include:
- Fewer filing costs (because Subchapter V does not require disclosure statements or the formation of a creditors’ committee)
- Simpler plan approval process (because Subchapter V does not require you to obtain approval from creditors before the court authorizes your plan)
- A greater likelihood of retaining ownership interests (because Subchapter V does not enforce the Absolute Priority Rule)
- The possibility of a debt discharge (after completing a 3-5-year repayment plan)
Overall, Subchapter V allows small businesses to reorganize and restructure their debt without having to liquidate all their assets. Many of the legal and financial roadblocks of Chapter 11 are simply not present in a Subchapter V case.
*The $7,500,000 debt maximum is a temporary increase from $2,725,625, established by the CARES Act. The increase will sunset in March of 2021.
Let an Experienced Professional Assist Your Struggling Business
Whether you obtain additional aid from the state or federal government, file bankruptcy, or employ any other legal or financial strategy, your small business can greatly benefit from professional support. Our attorneys at The Law Office of Mark B. French have assisted both consumers and businesses with the bankruptcy process since 1987. Attorney French, in fact, is Board Certified by the Texas Board of Legal Specialization as a bankruptcy specialist. This level of experience and knowledge is what your small business needs to overcome today’s hardship and prepare for tomorrow’s challenges.