Lots of small businesses had to shut down during the pandemic, and many more are barely hanging on. Maybe yours is one of them. Now the business just isn’t bringing in enough money to cover the bills, and it’s been getting worse and worse. First it was the rent, then it was the utilities, then it was payroll. So what happens next? There is no one right answer to this question. There are times when you can salvage the business. There are times when it makes sense to file for bankruptcy. But, there are also times when you just need to say good-bye to the business that you worked so hard to build. Here are the three paths worth weighing.
Talking to Your Creditors
For many businesses, the PPP funds and other government assistance are gone, and paying every bill on time may simply be impossible. Your landlord and creditors may be patient today, and they are still in a position to help you save your company. But next week, or next month, they may get fed up and lay a lawsuit on your doorstep. Once a judge puts the final stamp on a money judgment, your path to recovery from financial or cash-flow problems may be pretty limited. By then it may be too late to save the business.
Given that reality, your first line of defense is talking to your creditors, the people who you still owe money to. If your business cannot pay its debts, don’t hide. Call the landlord, the lenders and the vendors. Ask whether they will agree to a payment arrangement based on the income the business actually has, and try to make them your partner rather than your adversary. Remember, you want your creditors to understand how dire your situation is if you want them to work with you. Many may be willing to negotiate just to get some payment. They might be hurting, too. Negotiating could give you the time you need to get back on your feet and settle your debt, either fully or at a lower rate.
Small Business Bankruptcy
If you’ve tried to negotiate with your creditors and they won’t lower your payments, help you get on a payment plan, or otherwise settle with you, then it might be time to look into a small business bankruptcy. The Small Business Reorganization Act (SBRA) was enacted by Congress in August 2019. It went into effect on February 19, 2020. Chapter 11 is business reorganization, but there is a new option for Chapter 11 called Chapter 11 Subchapter V. That is the SBRA. For a small business, a Chapter 11 case is an expensive and time-consuming process. The SBRA made reorganizing quicker and less costly and removed many of the barriers that had kept small businesses out, which is why it can be a lifeline.
The Small Business Reorganization Act, as first written, only worked for companies that owed $2,725,625 or less. The CARES Act raised the limit to $7.5 million. It was just a temporary increase, though. It was set to expire one year from March 27, 2020, when the limit would return to $2,725,625, so check which limit applies before you count on it.
Subchapter V lets a business file a plan to pay the arrears on rent, mortgage, equipment leases and secured bank loans. It can also provide for paying some or all of what it owes vendors and other unsecured creditors. These payments are made out of future income over a period of three years, which can be extended to five. The bankruptcy court has to approve the plan, and in certain cases it can do so even if creditors don’t agree. At the end, all your remaining business debts are discharged. Discharged debts are no longer owed.
For a business that can meet its ongoing obligations but has fallen behind on rent or loan payments, a small business bankruptcy can afford the debtor time. Subchapter V can be helpful because a plan may help catch up on lease obligations and prevent the landlord from evicting the tenant. For a business facing an eviction judgment, it may be the only chance to stay in its premises and keep operating.
Different Ways to Shut Down
If nothing else has worked, closing may be the only option left, and there are four ways to do it. If you put all your business’s assets up as collateral for a loan, you can cut your losses by giving the bank back the collateral. Anything else the business owes is still the business’s problem—if you didn’t sign for it personally.
An assignment for the benefit of creditors (ABC) is usually done to wind down a business that has valuable assets and not much secured debt. It’s like a bankruptcy liquidation but is governed by state law, not federal law. The business signs a deed turning all its assets over to an assignee. Once the deed is recorded, the assignee liquidates the assets, creditors submit their claims, and a distribution is made on those claims. Other than signing the deed and cooperating with the assignee, the owner has no further obligation to the business.
If the business has no assets and not enough money to keep operating, you can simply close the doors and walk away. Typically, unless you personally guaranteed a business loan, you are protected by the corporate structure. Unpaid creditors may still pursue collection against the business, but if the business is completely insolvent, they may not be paid at all.
Finally, Chapter 7 is not the normal way to close a company. Should you file one? Only if you’re a sole proprietor. The discharge is the court order that wipes out debt. Only individuals can get that relief. Corporations and LLCs can’t get a discharge, so there’s no point filing Chapter 7 for those entities.
So, what can you do? First, try to talk to your creditors before they sue you and get a judgment. If you can’t reach a deal, maybe you can reorganize the business and keep it going. If you can’t do that, there are different ways to shut down. Be sure you know if you’ll be personally on the hook before you pick one.
