Pandemic Places Tens of Millions of Small Businesses in Jeopardy

It is fair to say COVID-19 has already unleashed a wave of economic devastation across the United States. With the virus still spreading and many states sheltering in various stages of lockdown, many business types are not even permitted to operate in any capacity. Those businesses that can open can often only do so in a limited capacity, with a fraction of the income they might usually see. The result is tens of millions of businesses experiencing financial distress, with over 100,000 small businesses already closing their doors forever.

It is a terrifying situation to experience, and with no clear end in sight, business owners must take proactive action to protect their interests. Fortunately, some new legislation has offered relief, and the institutions of bankruptcy remain to assist those struggling with debt. Below, we will cover the bankruptcy options small businesses can explore as the COVID-19 pandemic continues.

Some of the small business bankruptcy options we will cover include:

  • Small Business Reorganization Act (SBRA)
  • Chapter 11 bankruptcy
  • Chapter 7 bankruptcy

Subchapter V of the Bankruptcy Code (Small Business Reorganization Act)

The Small Business Reorganization Act was implemented as part of the new Subchapter V section of the Bankruptcy Code, amended in February of 2020. It was then augmented by the Coronavirus Aid, Relief, Economic Security (CARES) Act. The goal of the change was to give small business debtors a more advantageous debt relief option relative to filing for Chapter 11 bankruptcy. This boosted option could not have arrived at a better time, as it allows many qualifying small businesses to undergo a more streamlined, cost-efficient debt relief plan.

Major benefits to pursuing SBRA debt relief versus Chapter 11 bankruptcy include:

  • Relaxed reorganization plan requirements
  • Separate disclosure statement not required
  • No creditors’ committee, therefore, no professional fee obligations
  • No United States Trustee fee obligations
  • Other additional forms available to help save costs

In addition, SBRA debtors can potentially preserve equity interests in their company despite objections from creditors. Debtors can also modify residential mortgages if underlying loans were not used to acquire the property, and the residence in question was used primarily for business purposes.

As the name would imply, SBRA is intended for “small business debtors.” Under Subchapter V, a small business debtor is defined as someone who is engaged in commercial business activities but whose aggregate noncontingent, liquidated debt does not exceed $7,500,000 through March 27, 2021. Previously, a small business debtor had a debt ceiling of $2,725,625. The limit was raised to cover more businesses during the pandemic.

Corporations, limited liability companies (LLCs), partnerships, and sole proprietorships are all able to file under Subchapter V. Real estate debtors and public companies are not eligible for SBRA relief.

In addition, more than half of a debtor’s debts must stem from their business activities. They must also not belong to a consortium of debtors whose collective debts exceed the current debt ceiling.

If you are a small business debtor who qualifies for SBRA relief, you can voluntarily file under Subchapter V with a bankruptcy court to begin the process. Unless the court specifies otherwise, no creditor committee will be appointed. A US Trustee will appoint your case a Subchapter V trustee, who will help administrate your debt reorganization plan. You will be obligated to compensate this trustee.

You will have 90 days from filing to submit your debt reorganization plan, though checkpoint meetings are typically held at the 60-day mark. Your debt reorganization plan should include the following elements:

  • History of the business’s operations
  • Liquidation analysis
  • Evaluation of the debtor’s current and future ability to make payments under the plan
  • Transfer of an agreed-upon portion of the debtor’s income to Subchapter V trustee in order to facilitate the proposed plan

Unlike Chapter 11 bankruptcy, Subchapter V debt relief does not require you to pay expenses relating to your filing upon acceptance of the plan. Instead, you can spread out those costs over the duration of your plan’s execution. Again, a key advantage over Chapter 11 bankruptcy is, as there is no creditors’ committee, there are no creditor-fronted plans to compete with your proposal.

One other thing to consider, however, is how debts are discharged under Subchapter V versus Chapter 11. When filing for Chapter 11 bankruptcy, your qualifying debts are typically discharged upon confirmation of your proposed plan. Under Subchapter V, you can only discharge debts after plan payments are made and any other mandated conditions are met. This means it may take multiple years for your debts to be discharged. Additionally, filing under SBRA may preclude your business from qualifying for the Paycheck Protection Program; there is currently some disagreement over the legality of pursuing both, and, as of this writing, the issue is unresolved in higher courts.

Still, SBRA provides a much-needed, simplified option for small business debtors impacted by COVID-19. Those who qualify under the relaxed thresholds can save significantly in administration and professional fees under this option and will not have to compete with creditor plans when filing their reorganization proposal.

Chapter 7 and Chapter 13 Bankruptcy

While Chapter 11 Bankruptcy or SBREA under Subchapter V will likely make the most sense for most small business debtors, you may in certain circumstances still elect to pursue Chapter 7 bankruptcy. Often referred to as “liquidation” bankruptcy, this option places your company’s nonexempt assets in a trust, where an appointed Chapter 7 trustee administers the liquidation process.

Chapter 7 bankruptcy affords you certain beneficial protections, but you and your company’s officers will lose control of company assets. Any remaining employees will be dismissed as a result of the procedure.

Chapter 7 grants you an automatic stay, which halts any collections actions against you. This means creditors will not be able to foreclose or repossess company assets or continue or undertake lawsuits against you. For this reason, Chapter 7 can be an effective last resort.

A grand majority of businesses do not qualify for Chapter 13 bankruptcy, but some sole proprietorships are eligible. Filing under Chapter 13 avoids liquidation and instead reorganizes your debt into a court-approved, 3- to 5-year repayment plan, after which qualifying debts are discharged. For sole proprietorships, it can be a helpful tool if you have amassed significant debt but still have steady income with which to facilitate a repayment plan.

Let Our Team Help Your Small Business

Since 2012, Attorney Arthur J. Southard has worked to help fellow Ohioans find debt relief through all types of bankruptcy. We at the Southard Law Firm, L.L.C. are empathetic to the unprecedented trials small businesses are experiencing as a result of COVID-19 and are determined to do our part to fight for the future of our Cincinnati community. If you are a small business owner who is facing hardship and debt due to the pandemic and need assistance understanding your legal options for relief, our bankruptcy attorney can be the resource you need.

We can help determine if you qualify for filing for Subchapter V under the expanded SBRA and weigh the pros and cons of each course of action. Should you choose to file for bankruptcy of any type, we can represent you in each step of the process and make sure your interests are protected as you prepare a reorganization proposal or go through the liquidation process.

Get the support your business needs during COVID-19. Call or contact us online to schedule a consultation.