How Small Businesses Can Survive the COVID-19 Pandemic
Struggling Businesses Look for Relief
When the Coronavirus Aid, Relief, and Economic Security or CARES Act was passed by Congress in late March, it included several important measures to help business owners– particularly making it easier for business owners to seek bankruptcy protection (under Subchapter V of Chapter 11, also known as “Chapter 5” bankruptcy) and to receive additional financial support (through the Paycheck Protection Program (PPP), which allocated $350 billion in forgivable loans to companies with 500 or fewer employees).
What is a Subchapter V (“Chapter 5”) Bankruptcy?
Chapter 5 bankruptcy is a newer legal option to help small business owners stay in business while receiving relief from their creditors. During the Great Recession of 2008, many Utah business owners were struggling to find options to stay in business. At that time, businesses had two bankruptcy options, filing a Chapter 7 or a Chapter 11 bankruptcy. The problem with a Chapter 7 bankruptcy is that it simply liquidates the assets of the business. From 2008 to 2015, thousands of Utah businesses failed and their assets were sold off. Sadly, many of these businesses that failed had been viable for many years. After the economic slowdown of 2008, most of the small business owners didn’t want to close down or liquidate their assets. They just needed legal tools to work with their secured and unsecured creditors. Chapter 7 provided little assistance to these small businesses, other than closing them down, providing relief from creditors, and liquidating assets as needed. As a result, many Utahns lost their jobs and many small businesses disappeared.
Small business owners considered Chapter 11 bankruptcy as an option. However, the Chapter 11 option proved to be too cumbersome and too expensive for most small business owners. Filing fees, alone, cost thousands of dollars. Also, the Chapter 11 bankruptcy process became too complicated, driving up the legal fees and expenses for small business owners. Creditor committees proved to be severe roadblocks as well. A Chapter 11 bankruptcy requires a creditor committee to approve a business bankruptcy plan, which a single creditor could stop from happening. During the Great Recession in Utah, only a handful of Chapter 11 bankruptcies would be filed annually. In contrast, thousands of Chapter 7 bankruptcies were filed during that same period. In the end, the Chapter 11 bankruptcy process was typically only used by very large corporations, such as when K-Mart and Hostess filed for bankruptcy relief. Because of these and other challenges with Chapter 11 bankruptcy, most struggling Utah small business owners were forced to just close their doors or file a Chapter 7 and liquidate.
On February 19, 2020, the Small Business Reorganization Act of 2019, the Subchapter V of Chapter 11 (“Chapter 5”) went into effect. In 2019, Congress removed some of the burdens of the Chapter 11 bankruptcy process for small business owners by simplifying the confirmation process and lowering the filing costs. Also, Congress removed the Chapter 11 requirement for a creditor committee to approve a bankruptcy plan. In Chapter 5, there is no creditor committee. It works more like a Chapter 13, where a bankruptcy court judge can order the plan approved, known as a “cram down”. One of the drawbacks of a Chapter 5 bankruptcy, however, is that the small business could only have $2,725,625 or less in unsecured and aggregate non-contingent liquidated secured debts. Unfortunately, the $2.7 million debt limit is not a very large amount.
CARES Act raised the debt limit for small business owners seeking for bankruptcy protection under Chapter 5. The CARES Act increased the maximum indebtedness for small business debtors from $2.7 million to $7.5 million. The debt limit increase takes effect for cases filed from March 27, 2020, through March 27, 2021. Depending on the economic recovery, or lack thereof, Congress may or may not allow the higher debt limit after March 27, 2021. As a result, small business owners, who are looking at various options in relation to their debt management, should meet with an attorney who has experience with Chapter 11 bankruptcies. At Pearson Butler, PLLC, our bankruptcy department has decades of bankruptcy experience, including Chapter 11 and Chapter 7 bankruptcy options. Our attorneys can advise small business owners regarding Subchapter V of Chapter 11, also known as “Chapter 5” bankruptcies.
How Can Businesses Find Financial Support?
Despite the political fanfare with the passing of the CARES Act, it only took a matter of weeks for the initial funding to dry up, leaving many small business owners without the financial relief they so desperately needed. Although an April 24 bill injected another $320 billion into the PPP, as well as another $60 billion into the Economic Injury Disaster Loan (EIDL) program, a new report by Mainstreet America shows grim figures for small businesses across the country. According to the report, at least 3.5 million businesses could temporarily close by the end of June and over 7.5 million could be closed for good in the next five months or so.
According to one analysis, only 15% of the businesses hurt most by the pandemic were able to receive funds from the Paycheck Protection Program in its initial wave. Because the roll-out was chaotic at best – and many large companies have reportedly taken advantage of the situation to file fraudulent claims for relief – experts say that small business owners should expect continuing issues with their PPP loan applications.
Other alternatives for COVID-19 relief, then, could include:
- Continuing to work with the EIDL program. Designed to cover businesses in a declared disaster, the Economic Injury Disaster Loan program may have less federal funding overall, but it could still be an option worth exploring. Most EIDL loans go up to $2 million and are designed to be repaid over the course of 30 years, and while there have been some challenges, the Small Business Administration (SBA) is working hard to process older applications.
- Filing a claim for business interruption insurance coverage. Some companies may be eligible to file for business interruption insurance coverage under the terms of their property loss policies. Because insurance companies have denied many COVID-19 claims so far, however, it’s important to review your policy with an experienced attorney first.
- Seeking help from a small lender or trusted bank. Instead of turning to federal loan programs, it may be better to seek out a loan from a smaller lender or a local, trustworthy bank. Larger banks have quickly been overwhelmed by PPP loan applications and other requests for COVID-19 relief, and you may not get the same prompt attention and service as you would with a smaller bank.
- Considering bankruptcy/reorganization for your business. Chapter 11 bankruptcy and reorganization may not be an option for every business. However, if your debt continues to mount without relief in sight, it could be worthwhile to ask a bankruptcy attorney if your business is eligible for a debt repayment plan.
At Pearson Butler, our skilled attorneys are backed by the resources, reputation, and strength of a full-service Utah law firm. Able to work within a range of complex practice areas – including bankruptcy and business law – we are well-positioned to help struggling small business owners in Utah seek the coronavirus relief that they need.
Need to speak with a lawyer right away? Give us a call at (800) 265-2314!