How to navigate bankruptcy if the coronavirus destroys your business

For small businesses struggling to survive during the coronavirus crisis, bankruptcy can eventually present itself.

As aggregate deposits were down in April, the number of companies that filed for Chapter 11 bankruptcy – which involves debt reorganization and staying in business – jumped 26% from the previous year . And according to some experts, it won’t be long before the floodgates open to expose a glut of small businesses seeking relief.

“All I do all day is answer calls from companies with revenues ranging from $ 25 million to $ 50,000 that operate from their homes,” said Charles Bullock, lawyer. bankruptcy and founder of Stevenson & Bullock in Southfield, Michigan. .

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“They are not ready to file their case now, they are trying to overcome the closures and stabilize their business before attempting to reorganize it [in bankruptcy]”said Bullock.

In the first three months of this year, there were 5,952 corporate bankruptcy filings in total, up 6% from the 5,614 in the same period in 2019, according to the American Bankruptcy Institute. In April, although combined deposits (individual and commercial) fell 46%, experts say temporary factors caused it: economic stimulus funds helping both small businesses and individuals, as well as a pause in actions causing bankruptcy such as evictions, foreclosures and collections from creditors.

Of course, this patience for non-payment will not last forever. Experts expect corporate bankruptcy filings to increase in late summer, after Paycheck Protection Program loans run out and extended unemployment benefits end (slated for 31 July).

“Everyone I have spoken with is just waiting for this period to calm down,” said Richardo Kilpatrick, managing partner at Kilpatrick & Associates in Auburn Hills, Michigan. “The pipeline is full.”

While bankruptcy isn’t the only option for a struggling business – a business might simply dissolve due to little or no debt and few assets, for example – those whose obligations become unmanageable may find that the bankruptcy is the best way to move forward.

Chapter 11 vs. Chapter 7

First, if you expect your business to remain viable for the long term but need creditors relief now, a new Chapter 11 option may be appropriate. This path allows a business to remain operational and generally renegotiate debt and repay over a fixed period of time, as well as take other steps to return to profitability.

Called sub-chapter 5, this new route – it entered into force in February – is aimed at companies whose debt is below a certain threshold (with certain limitations). By next March, that cap is approximately $ 7.5 million. (A recently passed law reduced it by $ 2.7 million for a year.)

This option aims to make the bankruptcy process faster and cheaper for small businesses. It eliminates some costs and red tape, while allowing owners to maintain their interest in the business, among other differences from typical Chapter 11 cases.

Still, a Subchapter 5 filing always comes at a high price: around $ 10,000 to $ 50,000, depending on the complexity of the case, said Stuart Gold, managing partner at Gold, Lange & Majoros in Southfield, Michigan. The filing fee itself is $ 1,717.

However, before it comes to filing, you should consult a bankruptcy professional to make sure this makes sense.

“You want to make sure you have a viable business that can survive and needs some relief to justify the costs,” Gold said.

Meanwhile, a Chapter 7 bankruptcy involves a trustee liquidating the declarant’s assets and paying off creditors where possible. While this is a common route for individuals, it may not be suitable for a business entity because it will not write off the company’s debt, said Cara O’Neill, legal writer for Nolo. com and bankruptcy and litigation lawyer in Roseville, California. .

“Most business owners are primarily concerned with getting out of their liability for business debts, and it’s best to do this using a Chapter 7 or Chapter 13 personal file,” O’Neill said.

Personal guarantees

Even if your business is its own legal entity and is separate from your personal finances, owners who have provided personal security on their business debts are still supported even if the business goes bankrupt.

In this case, the way to potentially avoid the seizure of your personal property – i.e. your house, your car, your savings, etc. – is also to file a personal bankruptcy.

“We will see both the individual and the company file for bankruptcy to make a fresh start or [stop] collection of any debt. “

Charles Bullock

Bankruptcy lawyer and founder of Stevenson & Bullock

“It happens all the time,” said Bullock, of Stevenson & Bullock.

“It could be a midsize business where the group of owners have been forced to guarantee the debt, or an individual owner with crushing debt,” Bullock said. “We will see both the individual and the company file for bankruptcy to make a fresh start or [stop] collection of any debt. “

Deposit as an individual

Most people file under Chapter 7 or 13, which have a filing fee of a few hundred dollars, and hiring a lawyer can add $ 1,200 to around $ 3,500, depending on where you live. and the complexity of your case.

Both methods stop collection activities such as calls from creditors or debt collectors, wage garnishments and, potentially, lawsuits against creditors. (Court judgments already in place are more difficult to clear in bankruptcy, as are some other types of debt, including student loans.)

However, there are differences in who qualifies and how debt is handled in each option. Chapter 7 is generally intended for people who do not have enough income to repay their debt and who have few assets. It is also the most common way to file for individual bankruptcy.

This approach quickly wipes out many forms of debt, including credit cards, medical bills, personal loans, and, potentially, those personal guarantees. However, this does not necessarily prevent the repossession of your car or the foreclosure of real estate.

Chapter 13 typically gives you three to five years to pay off certain debts and keep the asset (i.e. a house or a car). It also prevents creditors from garnishing your paycheck or taking a debit from your bank account. For this deposit option, you must have income and your debt (both secured and unsecured) must be less than a certain amount (approximately $ 1.6 million in total).

For people whose debt exceeds this threshold, Chapter 11 might be the best choice. This is the least commonly used option for individuals.

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