Bankruptcy Could Help Business Owners - Recent Amendments in COVID Relief Bill
The COVID-19 pandemic has wreaked havoc on businesses throughout the country, including in Ohio. With so many people staying at home, many local businesses have found themselves in dire financial straits.
Many small business owners are finding themselves facing tough decisions, including the possibility of filing for bankruptcy. But bankruptcy isn’t easy and comes with its own costs, making a traditional bankruptcy case more challenging for smaller businesses.
However, there is an option that may be more feasible for small businesses that are struggling. Congress passed the Small Business Reorganization Act in 2019, which went into effect in February 2020. It introduced a faster, cheaper way for smaller businesses to file for bankruptcy. Furthermore, the various COVID-19 relief bills passed in 2020 give small businesses additional resources to keep their doors open in this time of financial uncertainty.
What Is the Small Business Reorganization Act?
The Small Business Reorganization Act of 2019 (SBRA) was in the works long before the pandemic broke out. It was not originally intended as a COVID-19 relief measure. All the same, it contains a number of provisions that small businesses can take advantage of in these difficult times.
One key provision of the SBRA is that it added a new subchapter to the federal Bankruptcy Code. Struggling businesses that do not want to liquidate their assets usually file for bankruptcy under Chapter 11. A Chapter 11 bankruptcy allows you to keep your business open while you find a way to resolve your debts, but it’s often time-consuming and carries its own costs. This makes filing for Chapter 11 a challenge for businesses that do not have significant assets on hand.
Thanks to the SBRA, businesses no longer have to use Chapter 11 if they want to reorganize their operations instead of liquidating. The new subchapter is known as Subchapter V, and it falls under Chapter 11. By using Chapter 11, Subchapter V, small businesses can file for reorganization bankruptcy in a quicker, cheaper, and more streamlined manner.
How Could a Subchapter V Bankruptcy Help a Small Business?
There are many different ways filing for bankruptcy under Chapter 11, Subchapter V can help struggling small businesses.
For one thing, Subchapter V bankruptcy streamlines much of the paperwork that would be required in a traditional Chapter 11 bankruptcy case. Under Subchapter V, you do not have to include a disclosure statement when you file for bankruptcy. Disclosure statements are highly detailed documents that require you to gather a lot of information. They’re often contentious because they need to be approved by creditors. Instead, in a Subchapter V bankruptcy case, you only need to include a brief statement of your income and assets, along with your recent tax returns and a few other pieces of information.
Another advantage of filing for bankruptcy under Subchapter V is that there’s no creditors’ committee that needs to approve your reorganization plan. This is actually a twofold benefit. First, it means it’s easier to get your reorganization plan approved because the main party that has to approve the plan is the bankruptcy court judge, not your creditors. Second, being able to get your plan approved more quickly means you’re spending less time in court and more time getting your business back into working order.
Finally, bankruptcy cases under Subchapter V have a 90-day filing deadline, which is also advantageous for small businesses. A shorter filing deadline may not sound like a good thing, but one of the hidden costs of filing for Chapter 11 bankruptcy is the monthly fees you have to pay while you’re putting together your reorganization plan. For businesses with fewer assets, these fees can quickly add up and make it even harder to find a path toward financial stability. By shortening the duration of your bankruptcy case, Subchapter V can significantly lower the costs of filing for bankruptcy and let you get back to work more quickly.
Does the COVID Relief Bill Help Those Facing Bankruptcy?
In addition to the SBRA, the COVID relief measures passed by Congress throughout 2020 can help businesses facing bankruptcy in other ways.
One way that these measures have helped businesses is by increasing the debt limits for those who wish to file for bankruptcy under Subchapter V. The baseline debt limit for filing for Subchapter V bankruptcy is $2,725,625. The COVID relief bills increased that limit to $7.5 million until March 2021. This greatly expands the number of businesses that are eligible to file for bankruptcy under Subchapter V.
There are other important provisions in the COVID relief bills that can help people or businesses facing bankruptcy. Debtors now have an additional 90 days to decide whether to accept a new commercial lease when they file for bankruptcy under Subchapter V, giving them 210 days to make their decision. This time period can be extended an additional 90 days if requested by the debtor and approved by the bankruptcy court. This gives debtors potentially up to 300 days to approve or reject their lease.
This altered provision of the Bankruptcy Code will sunset in a few years, but it will continue to apply for all Subchapter V cases that began before the sunset date of Dec. 27, 2022.
Thanks to the COVID relief bills, businesses that file for bankruptcy under Subchapter V also have more time to start paying rent. The previous time limit under the SBRA was 60 days. If the business can show they’ve experienced additional difficulties thanks to COVID-19, they can be granted an additional 60 days to start fulfilling their debt obligations.
Do you have specific questions about how the SBRA and the COVID relief packages could impact your small business? The bankruptcy attorneys at Amourgis & Associates would be happy to answer those questions for you. Call one of our Ohio offices today or visit our contact page to get your free initial consultation.