- Congress helps with bankruptcy relief.
Under chapter 11, businesses can reorganize, accomplish sales of assets or achieve a sale of the business in a more ordinary course environment in order to maximize values. However, a “regular” chapter 11 poses a number of obstacles for smaller businesses, particularly those that are closely-held. Chapter 11 cases can also be expensive.
In 2019, Congress set out to make reorganization more effective and affordable by enacting Subchapter V as part of Chapter 11. The law only became effective February 19, 2020. It offers a streamlined procedure and a significantly easier path to court approval of a plan of reorganization. For those reasons, it is likely to be significantly less costly. Relief under subchapter V was, however, limited to businesses with less than about $2.7 million in debt. As part of the Coronavirus Aid, Relief and Economic Security Act, Congress expanded the eligibility of small businesses to take advantage of the reorganization provisions of the Bankruptcy Code. The latest legislation, which became law on March 27, 2020, increased the debt threshold to $7.5 million.
Subchapter V now makes bankruptcy reorganization a more effective and practical tool to allow many more businesses to survive today’s shut down economy until more normal times return.
- Help from the SBA
SBA economic disaster relief loans became available for Coloradans last week: It’s not entirely clear what underwriting requirements the SBA will have, whether the disaster loans will require some security (personal guaranty, DOT on principal’s house, etc.), but repayment terms are generally much better than market. The application process is all online. It’s hard to tell how quickly the SBA can evaluate, underwrite and fund, but worth a try for many businesses. https://disasterloan.sba.gov/ela/Declarations/DeclarationDetails?declNumber=6063326&direct=false
On March 27, 2020, the CARES Act became law, which provided additional assistance for small business owners and non-profits, including the opportunity to get up to a $10,000 Advance on an Economic Injury Disaster Loan (EIDL). According to the SBA, this Advance may be available even if your EIDL application was declined or is still pending, and will be forgiven. www.sba.gov/DISASTER.
- Why Bankruptcy Experience Matters
In the current economic environment, many businesses and their owners are forced to explore the previously unthinkable: bankruptcy. While Onsager | Fletcher | Johnson lawyers are highly experienced in business and individual business-related chapter 11 and chapter 7 cases (for debtors and creditors), the firm’s philosophy is to explore every avenue outside of bankruptcy for resolving financial difficulties first. To us, bankruptcy is almost always the last option.
The current unprecedented situation presents factors that make non-bankruptcy options feasible. The cause of financial difficulty, basically a government-mandated shutdown of much of the economy, is not related to the fundamentals of the business in normalized circumstances. The impact on the general market means that creditors are likely to be incentivized to work with debtors. After all, a foreclosing creditor faces the possibility that there are no buyers, and foreclosure does not make accounts receivable any better. Landlords are likely to have few if any options to relet space. Trade vendors may receive nothing if they force bankruptcy. Many creditors will therefore be looking at the future return to normality for any measurable repayment and will be interested in assisting their borrowers get to that future.
Some business owners will immediately look to borrow to bridge the gap between today and a “normal” environment. This is not necessarily the best path and, in our view, should only be done after considering the consequences and exploring negotiations with creditors first.
Navigating the troubled waters takes experience and a thorough understanding of the options. The process also takes finesse, not necessarily an aggressive approach. Negotiations with creditors often take place against the backdrop of a potential bankruptcy and what creditors (and debtors) can expect if there is a filing. But businesses and their owners also need advice on what happens in both bankruptcy and non-bankruptcy situations. Workouts require a firm understanding of the end goals and the alternatives, or missteps can be made. We offer that guidance. Onsager | Fletcher | Johnson lawyers understand the nitty-gritty economics of a business – we do the math – which allows us to offer the most intelligent advice possible on every possible course of action.