Small Businesses: Is Bankruptcy the Right Option During the Coronavirus Pandemic?

Posted by Mohsen Parsa | May 27, 2020 | 0Comments

The coronavirus pandemic continues even as businesses start to reopen more and more in June and July throughout California and the United States. It is important to remain cautious, however, since the numbers of COVID-19 cases are still rising in California and many other states. Who knows what the future holds. And that is a scary prospect for small businesses who were forced to be closed and who still suffer from the impact of closures and continued reduced business.

What's more, the relief meant for small businesses (e.g., the Family First Coronavirus Response Act and SBA Loans) is quickly drying up or time is running out. Though more relief may be on the way, this matters to businesses and startups who do not qualify or have not yet taken advantage of all the programs available to them during this nation-wide crisis. Some small business owners may be considering bankruptcy. If you are, then here's an overview of what you should know.

How Can Bankruptcy Help Provide a Lifeline to Your Business?

The first thing to keep in mind about bankruptcy and small business is this: bankruptcy does not mean the end of your business. In fact, it is quite the contrary. Bankruptcy is meant to help a business reboot and to keep operating; it is not meant to shutter your business. 

Businesses seeking bankruptcy file under Chapter 11 or (to a lesser extent) Chapter 13. Chapter 11 bankruptcy does not wipe out debt but rather helps a business balance its income and expenses, pay down debt, and re-establish profits. Also, for small businesses, you can benefit from the Small Business Reorganization Act of 2019. This Act became effective in February 2020 and was passed 

to expedite and reduce the cost of bankruptcy for small business debtors to reorganize their debts and save their businesses[.]

Small businesses qualify under this new code called Subchapter 5 if your debt is valued under $2.7 million. For one year, however, due to the coronavirus pandemic, the debt threshold has been raised to $7.5 million. More businesses can benefit from this new law if acted on soon.

As for Chapter 13, only small businesses owned and operated by an individual (i.e., a sole proprietorship) can file for this type of bankruptcy. If you are a sole proprietor, this may be a good option to restructure your debt and keep your business alive and thriving. There are, however, specific debt limits to be eligible for this type of bankruptcy – and these limits can change year to year. New debt limits for 2020 have not yet been released, but for 2019, the debt limits were:

  • $419,275 for unsecured debt; and
  • $1,257,850 for secured debt.

If your small business owes more than these limits, you will have to file a Chapter 11 bankruptcy.

Is Bankruptcy Right for You during the Coronavirus Pandemic?

The problem right now for small businesses is this: affording rent, insurance, utilities, and other overhead costs when you've been forced to close or reduced business due to the pandemic and stay-at-home orders.

Before you consider bankruptcy, you want to exhaust all other measures. Specifically, you want to make sure you do not qualify for any other programs designed specifically to help businesses survive the coronavirus pandemic. If you do qualify and have moved forward on these opportunities, you need to calculate if it's enough. Consider this: the U.S. Chamber of Commerce published a Special Report on the coronavirus and its impact on small businesses. It states that 

[f]orty-three percent [of small businesses] believe they have less than six months until a permanent shutdown is unavoidable.

There are signs of hope in this report but uncertainty still prevails. 

Speaking to an attorney with specific practice areas in business law and bankruptcy in the Los Angeles and Orange County area may be in your best interest. An attorney can identify programs, speculate on the future of the business, and provide advice on bankruptcy. Depending on your decision, the attorney will help you through the process. 

Whatever you decide: bankruptcy is not your enemy but a useful tool (among other tools) that will help you rebuild your company after hard times.

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