Many small businesses have closed completely due to the coronavirus. Many others are barely hanging on, racking up loans and unable to pay normal business expenses. Business owners face tough choices as to whether to salvage the business or shut it down. If you are in that spot, there are three things to weigh:
- 1) negotiation with creditors,
- 2) reorganization under Subchapter V of Chapter 11, and
- 3) business closure.
Treat Them Like Partners and Not Adversaries
When all the money you can get from the government and the PPP loan has been spent, you may not be able to make payments as you normally would. Landlords and creditors may not wait for you to figure out how to catch up. If they sue and win a judgment, it may be too late. Don’t be the kind of person to ignore the problem and hope it blows away like a leaf on a windy day.
Call the landlord, your bank and the other businesses that you owe money to. Ask them for a break or to work with you based on the income you have. Treat them like partners and not adversaries. Depending on the creditor, he or she may be willing to work with you to get at least some payment, as the creditor may be in a similar predicament. Such an arrangement may give you time to rebuild the business and eventually catch up, paying all or part of the amount owed. There is nothing wrong with asking for help.
Small Business Bankruptcy
If you can’t negotiate with your creditors, small business bankruptcy may save your business. Subchapter V of Chapter 11, adopted by Congress under the Small Business Reorganization Act (SBRA), became effective on February 19, 2020. It created a streamlined and less expensive bankruptcy process for small businesses. Congress passed the law in August 2019. It eliminates many obstacles that had prevented small business debtors from reorganizing. The idea is to put the business back on its feet, get it generating cash flow and able to service its debts, so it can make payments to its lenders.
Originally, the Subchapter V bankruptcy process was limited to businesses with a total debt of not more than $2,725,625. The CARES Act temporarily increased the limit to $7.5 million for one year from March 27, 2020. After that, the limit is set to revert back to $2,725,625. Because the limit has moved before, confirm the current figure with a bankruptcy attorney before you count on it.
So how does it work? You’ll file your debt repayment plan (the Plan). The Plan is crafted and submitted by the debtor to cure arrears on rent, mortgage or equipment leases, and bank debt. The Plan also provides for payment of some or all of your debt to vendors and other unsecured creditors. The Plan lasts for three years and can go up to five years if needed. Payments are made from future business income. The Plan must be approved by the Bankruptcy Court and may be approved over creditor objections. When the Plan is completed, the remaining debts are discharged and no longer owed.
Subchapter V may be an option for a company that can keep up with current expenses but would like to cure past-due expenses, such as rental payments and loan payments. It may be the only chance to avoid eviction and allow a business to continue to operate.
Closing May Be the Only Option Left
If every effort to keep the doors open has failed, closing may be the only option left. There are four ways to do it.
If you have committed all of the business assets as security for a bank loan, you may be able to return the security to the bank. All other debts continue to be owed by the insolvent business unless the owner is personally liable.
An Assignment for the Benefit of Creditors (ABC) is a state law liquidation process. It’s often used for businesses with valuable assets and little or no secured debt. It works much like a bankruptcy liquidation, but under state law rather than federal law. The company assigns all of its assets to an Assignee via a deed. Once the deed is recorded, the Assignee sells the assets, seeks submission of claims from creditors, and distributes the proceeds to the claimants. The business owners have no further involvement in the business after they have executed the deed and assisted the Assignee.
A business that has no assets and cannot afford to operate any longer can just shut down. If you are not personally liable for any business debts (typically by signing a personal guarantee), you do not have to pay those debts. The business’s unpaid creditors can try to collect from the business, but they will not be paid.
Chapter 7 only works for a sole proprietorship, since only individuals can receive a discharge (an order wiping out the debt) in Chapter 7. Corporations and LLCs cannot. Without a discharge, there is no reason for them to go through that process.
In short, talking with the landlord, lenders and others as soon as possible offers a chance to save the business, if it is salvageable, or to work out some compromise on the debts. If that fails, Subchapter V or an orderly closing may still be available. Business owners who have not personally guaranteed business debts are not typically required to pay those debts. Time runs out the longer businesses wait. Whichever road fits your business, absolutely never sit and do nothing.
