By Alexander H. Haberbush, Esq.
When it comes to a global pandemic, the disease and its symptoms are just the tip of the iceberg. While we’re coping with quarantines, travel bans, and infected friends and loved ones, the virus silently takes its toll on our economy as well. It’s unavoidable: when we struggle, our businesses struggle. And when the whole world struggles, well… I think you get the idea.
There is no one story of how business is affected by the Coronavirus pandemic. In some cases (especially restaurants, retail stores, and theaters), demand simply diminishes – fearful of catching or transmitting the disease, more people are staying home. In other cases, needed supplies become unavailable, staff calls in absent, flights are grounded, and meetings postponed. Unfortunately, for all too many, fixed expenses continue as usual, despite these disruptions. The effects can be catastrophic, even for formerly healthy businesses.
The average small to medium-sized business in the United States only has operating capital to last about three months, at most. At the time of this writing (3/16/2020), we do not know how long the effects of COVID-19 will take their toll. But, even after the virus is eliminated, it will take time for the streams of commerce to restore. Manufacturing has already slowed in China. So far, there are enough supplies that few shortages have ensued, but once they do, restarting the engines of commerce is not something that can be done in a day.
Businesses in sectors accustomed to market fluctuations tend to keep more cash on hand and may be able to weather the storm, but, for all too many, COVID-19 may push their businesses into the red – even past a point where their liabilities exceed their assets.
So, what then? For many, businesses are far more than just money: they’re dreams we’ve had our whole lives, into which we’ve poured countless hours and expended countless emotions. We love them dearly. Losing them would be almost like losing a loved one. Is there any way to pay back the debt without drowning in it? Is our dream dead?
For many, they fear they may have to face the dreaded word: bankruptcy.
So, what’s the best option?
There are currently no unique laws in place to financially assist you or your company in this pandemic. The administration is currently pushing for a “bailout” for the airline industry, but barring some targeted program, the average small business (without a team of lobbyists) must look to our existing laws. However, this should not be cause for alarm. The United States, and California in particular, has a strong system of laws to help you and your business in financial difficulty. First, it’s important to remember that all situations are different. Businesses aren’t all structured the same way and don’t fail for the same reasons. So your “best” option isn’t necessarily going to be the “best” option for another business affected by COVID-19. However, it is possible for you and your business to move forward. While this article is not legal advice and cannot substitute for speaking with a bankruptcy attorney, the goal is to give you some hope there are legal processes available to help you get through this worldwide crisis.
How do I know which option is best for my situation?
Well, let’s take a look at what those options are and who might use them.
First, let’s get the monster out of the closet. Let’s take a look at bankruptcy.
While popularly “bankruptcy” may be thought of as a single option, it’s actually several very different types of options. These options fall under different chapters of the U.S. Code (the federal law controlling bankruptcy).
Chapter 7
The most basic (and most drastic) form of bankruptcy is the one most people think of: liquidation. Liquidating bankruptcies are controlled under Chapter 7 of the U.S. Bankruptcy Code. This is exactly what it sounds like: through a process overseen by the courts, the assets of a business are sold (by a Chapter 7 Trustee), and their proceeds are distributed to creditors according to a statutorily-defined priority. No one wants to liquidate unless they absolutely have to.
Chapter 11
Though called a “bankruptcy,” Chapter 11 of the U.S. Bankruptcy Code actually allows a business to resolve its debts and continue operating. For most businesses affected by the coronavirus, Chapter 11 is likely to allow a reorganization and continuation of the business. This option allows otherwise profitable businesses to restructure and eliminate their debts. The Chapter 11 process immediately puts a full stop to the ongoing pressures of creditors and allows the business to pay back its creditors, often at a very discounted rate, over time through what is called the “Chapter 11 plan.” Your attorney will work with you in forming a Chapter 11 plan that works for you. If your business was doing well and would have done well except for the financial upheaval caused by the coronavirus, it is likely that your business could fully recover and continue to thrive once again if it can resolve the old debt. A Chapter 11 bankruptcy allows you to do this.
For example, some of the companies mentioned above, such as restaurants, theaters, and retail stores, are almost certain to feel the effects of California’s recommendations for public venues. On March 13, 2020, California Govenor Newsom recommended that non-essential gatherings of more than 250 people be canceled and that smaller events should be cancelled unless the organizers can implement social distancing of six feet per person. These recommendations grow more stringent each day. Even if a business was thriving as of March 12, 2020, they may not be able to operate for some time. With creditors knocking down the door and unable to generate cash, these businesses would likely be doomed, absent relief under Chapter 11. Far from an economic death knell, much of the continued thriving of the U.S. economy can be credited directly to the existence of Chapter 11 bankruptcies, since they allow strong businesses to remain strong, rather than succumb to temporary problems. Even businesses that were not formerly strong may be able to take advantage of this form of bankruptcy, but it will depend largely on your type of assets and how they are structured. An attorney will be able to tell you more.
Individual Bankruptcy
Individuals can also benefit from a Chapter 11 or Chapter 13. These types of bankruptcies generally allow individuals to keep their assets and pay their creditors monthly payments over time, again, often at a steep discount. This may be an option for those individuals who are hit hardest by the coronavirus either due to inability to work or pay living expenses and/or other creditors.
Also, sometimes, creditors of your business can come after you personally. Try as you might to structure your business so that you are insulated from the business’s debts, despite your best efforts, creditors can try to breach that wall. Bankruptcy may provide a way to resolve that debt as well.
Non-Bankruptcy Alternatives
The primary non-bankruptcy alternatives are these: Assignments for the Benefit of Creditors (ABCs) and Receiverships. You can learn more about these at www.etinsolvency.com.
It also looks like the SBA will be offering loans to those businesses struggling due to the effects of COVID-19. While a loan may be a good solution for you and your business, the SBA often requires that you give a personal guarantee for the loan or secure the loan on the business (or even your personal) assets. Given these realities, it is important to talk to an attorney before you obtain financing.
Don’t wait too long!
As the situation is in constant flux, it is never too early to speak with an attorney regarding your concerns, possible alternatives, and risks. All too often, business owners will approach an attorney only after expending all other options, and by this point, many of the best options are no longer available, and the bankruptcy process ends up being expensive and leaving no choice but liquidation. One wrinkle in this is that if a business anticipates more debt or financial distress in the future, it may be best to wait to file for bankruptcy. In the case of COVID-19, things are still changing very rapidly. Your attorney may advise that it is better to wait to file any bankruptcy proceedings until things become more certain and stable, but he or she can help you find concrete, tangible things to do today to prepare your business, whether you end up needing to file or not. That way, if it comes time to file a bankruptcy, the process is as effective and the outcome is as beneficial as possible, when it does come.
The United States has robust bankruptcy laws. Those laws exist to help individuals and businesses in exactly the situation we are facing. While the coronavirus may be a unique situation, the law is flexible to help respond to the financial repercussions of this crisis.
Haberbush, LLP offers free consultations. We can help you know what your options are for your business and how you can prepare yourself.
