Small Businesses and Bankruptcy in a Time of Pandemic
It’s safe to say that there is a risk of failure right now for new or fledgling small businesses. COVID-19 is putting a strain on the world economy that has begun what some fear is a slow grind to an inevitable halt for many U.S. small businesses. This is forcing many small businesses owners to consider business bankruptcy.
According to the American Bankruptcy Institute, commercial bankruptcy filings in February 2020 in the U.S. totaled 1,177. A chart showing the share of risk related to Coronavirus by type of service provided places passenger airlines, gaming, and automotive at the highest risk, with REITs, homebuilding, telecom, media, construction, food, and beverage at the lowest. I do a lot of work with local small businesses here in the Coastal Bend area, and while many of them are at the lowest risk according to this chart, that doesn’t translate proportionately to the financial loss many of my clients are anticipating.
I’ve found that the first thing my small business clients want when dealing with financial worry is information, the close second to which is reassurance. I’ve taken the basics of business bankruptcy and laid them out below to hopefully provide readers with both. The takeaway I’m hoping for is that it’s not too late to arm yourself with knowledge and come up with a plan for your small business until the economy recovers from the effects of the Coronavirus.
WHAT TYPES OF FINANCIAL HARDSHIPS WILL SMALL BUSINESSES BE FACING?
Small business owners who close their shops will be facing unpaid bills such as payroll, accounts payable, and fixed debt. And the biggest shock of all is how two weeks ago, a lot of businesses were seeing record sales. Now many small business owners have laid off their employees. Depending on how they funded their businesses, many are spending a lot of time on the phone trying to work with loan agents, vendors, insurance companies, and regular clients asking if they’re going to reopen.
I’m going to go over loans as an option prior to bankruptcy below, but this is a second-to-last resort that many small business owners are trying to avoid taking because they don’t want to take on more debt. A recent Goldman Sachs survey of 1,500 of their “10,000 Small Businesses” participants shows a variety of options these owners would like to see made available by the government, such as grants, a payroll tax cut, reimbursement for paid sick leave, delay of tax payments, delay of mortgage payments without penalty, reduced-rate interest loans, government-backed quick loan program, and enhanced unemployment insurance. Bankruptcy wasn’t listed here, but 51% of those surveyed reported they will only be able to stay open for another 0-3 months. It’s eerie how 0 is included – see their survey results overview here: https://www.goldmansachs.com/citizenship/10000-small-businesses/US/no-time-to-waste/index.html.
RESOURCES FOR HELP BEFORE BANKRUPTCY
Gloomy statistics aside, the U.S. government is taking some steps to help businesses survive. The U.S. Small Business Administration is providing federal disaster loans for businesses, private nonprofits, homeowners, and renters here: https://disasterloan.sba.gov/ela/ . Texas has been working with the SBA to show a need for these loans, such as declaring a statewide disaster for all Texas counties, but the state has to identify at least five small businesses who have suffered “substantial economic injury” in a disaster area as a result of COVID-19 to be able to extend the loans to its small business owners.
Facebook is offering $100 million in cash grants and ad credits for eligible small businesses through its Small Business Grants Program, and its Boost with Facebook website says it will be taking applications ‘in the coming weeks’. The SBA also provides a resource for SBA-associated grants and cooperative agreements for small businesses here: https://www.sba.gov/funding-programs/grants/grants-programs-eligibility . The Office of the Governor website for Texas Economic Development lists state and federal small business resources here: https://gov.texas.gov/business/page/small-business-programs and while a lot of programs are geared toward development, they do have links to the Veteran’s Business Outreach Centers and SCORE, which is a nonprofit that provides counseling, advising, and mentors for small business owners.
TYPES OF BANKRUPTCY FOR BUSINESSES
If you’re past the point of grants and loans, there are three types of bankruptcy used most for businesses: Chapter 13, Chapter 7, and Chapter 11. (There is also Chapter 12 bankruptcy available for Texas farmers and ranchers). Before getting into a description of each, let’s talk stigma.
It’s obvious that bankruptcy is a final resort for business owners. Most won’t do it unless there is no other choice. This places a negative stigma on bankruptcy as something shameful or embarrassing, and it’s not fictional. There’s potential for public opinion to lean toward accusations of negligence or irresponsibility. But right now, with so many small business owners in the same boat, no one can really point the finger at or blame another – they’re all at the mercy of COVID-19’s economic effects, which of course is something that is/was beyond our control.
I’m a small business owner too, and while bankruptcy isn’t something I’m currently needing to consider, who’s to say law firms like mine shouldn’t be prepared in the event it becomes necessary. So, please read on below with the attitude that you are arming yourself with knowledge. That’s the responsible thing to do right now as a small business owner.
- Chapter 13: Chapter 13 bankruptcy is an adjustment of debts for individuals who have regular income. This applies to you if you operate your business as a sole proprietorship since a sole proprietorship structure means there is no legal distinction between you individually and your business entity. In Chapter 13 bankruptcy, your goal is to reorganize instead of liquidating; this way you stay in business. You file a repayment plan with bankruptcy court, repaying what you can depending on your income, debt, and assets.
- Chapter 7: Chapter 7 business bankruptcy is used when you must liquidate your assets instead of restructuring because the amount of debt the business is in is too much to foreseeably be able to get out from under. This is useful when your business does not look like it’s going to survive. Sole proprietorships, corporations, and partnerships can use Chapter 7. You apply to the court for Chapter 7 bankruptcy and, if your application is approved, you are appointed a trustee who takes possession of your business assets and ‘pays off’ your creditors and trustee’s fees. At the end, if you are a sole proprietor, you receive a discharge releasing you from any obligation for those debts.
- Chapter 11: Chapter 11 business bankruptcy is usually a better choice if your business is structured as a partnership or corporation, or sole proprietorship whose income is too high for Chapter 13. The business is appointed a trustee like in Chapter 7, but the business stays open while creditors are presented with a reorganization plan and get to vote on that plan. If the court approves the plan, the business can pay creditors over time, terminate contracts and leases, discharge some of its debts, and recover some of its assets. The Small Business Reorganization Act of 2019 amended Chapter 11 of title 11, United States Code, to provide for the option that a committee of creditors does not get appointed and vote on your reorganization plan.
SHOULD YOUR BUSINESS FILE FOR BANKRUPTCY?
The immediate protection Chapter 7 bankruptcy provides sole proprietors (from creditors, including protection from lawsuits, correspondence, garnishment, repossession, and income tax liens) is attractive. In a matter of months, your qualifying debt is eliminated. This does not include some debt, like child support. You can keep most or all of your property, if you do not have a lot of property, as Chapter 7 allows you to keep certain exempt assets. But not all businesses owners are willing to close the doors just yet.
Chapter 13 or Chapter 11 bankruptcy keeps your doors open (if you have enough money coming in each month), protects you from creditors, and allows you to keep more property than Chapter 7. But, if you’re not a sole proprietorship, you won’t be entitled to a discharge of the business’s debts.
It’s smart to talk to a bankruptcy attorney before deciding to file for business bankruptcy. There are details specific to your circumstances that will necessitate careful review and planning as not all bankruptcy cases are simple or ‘straight bankruptcy’ cases. You may just need a neutral third party to review your situation from a fresh perspective. The attorneys and staff at the Law Offices of Alex R. Hernandez, Jr. PLLC hope you stay healthy during this nationwide crisis. If you find yourself considering bankruptcy, please contact my firm. I’m happy to help a fellow small business owner.
Alex R. Hernandez, Jr.
https://www.abi.org/newsroom/bankruptcy-statistics, accessed March 22, 2020.
 See https://www.abi.org/newsroom/chart-of-the-day/share-of-companies-exposed-to-financial-risks-from-coronavirus-by-industry, accessed March 22, 2020.
 See https://www.goldmansachs.com/citizenship/10000-small-businesses/US/no-time-to-waste/index.html, accessed March 22, 2020.
 See https://stubbsalderton.com/covid-19-legal-briefing-sba-economic-injury-disaster-relief-loans-eidls/ accessed March 23, 2020.
 See https://www.law.cornell.edu/uscode/text/11/chapter-12 accessed March 23, 220
 See https://www.congress.gov/bill/116th-congress/house-bill/3311/text accessed March 23, 2020